Modi govt blinks, reduces petrol and diesel prices by Rs 2.5 a litre

Facing widespread discontent over the steep rise in fuel prices in recent months, the Union government on Thursday bit the proverbial bullet and cut the excise duty on petroleum products by Rs 1.50 a litre with immediate effect. Additionally, state-owned oil marketing companies (OMCs) have reduced the prices by Rs 1 a litre. This is the first time in more than four years that prices of either petrol or diesel are being controlled.

Union Finance Minister Arun Jaitley said he was also writing to all states to effect a similar Rs 2.50 a litre cut in the value-added tax on petrol and diesel. After his announcement, Maharashtra, Gujarat, Chhattisgarh, Assam, Tripura, Uttar Pradesh and Jharkhand announced a Rs 2.50 a litre cut.

Jaitley said the exchequer would take a hit of Rs 210 billion on an annualised basis due to the excise duty cut.

The impact could be Rs 105 billion in the current financial year, with six months already gone, he added. The calculation assumes that every rupee a litre cut in fuel prices leads to revenue forgone of around Rs 140 billion.

“If the domestic parameters of revenue are strong, it is only then we can extend relief. The revenue collection of the Centre is intact not because of increase in rates, but because of expanding tax base. We will be able to absorb this Rs 105 billion (hit) through increased collections,” the finance minister said. “I am confident that we can maintain the fiscal deficit target. We are committed to the target of 3.3 per cent of GDP.”

In absolute terms, Rs 105 billion is nearly 1.7 per cent of the year’s fiscal deficit target of Rs 6.24 trillion. As percentage of GDP, it is 0.05 per cent.

The move will have a major impact on the finances of OMCs. According to industry sources, the reduction in the retail marketing margin of OMCs will affect the annual profit after tax of Indian Oil Corporation (IOC) by Rs 42 billion, Bharat Petroleum Corporation (BPCL) by Rs 25 billion, and Hindustan Petroleum Corporation (HPCL) by Rs 22 billion.

On Thursday, shares of IOC closed 10.57 per cent lower at Rs 140.85. HPCL and BPCL also suffered heavily, ending the day 12.23 per cent and 10.89 per cent lower at Rs 220.60 and Rs 336.35, respectively, on the BSE.

After the cut, the marketing margin of OMCs on petrol has come down to Rs 0.7 a litre, and on diesel to Rs 1.3 a litre. “This can no longer be called a decontrolled regime. This will have a long-term impact on the finances of the three OMCs,” said a senior OMC official on condition of anonymity.

“OMCs are fully competent to deal with the situation. Their financial position today is much stronger compared to what has been in the past, when they had to charge lesser,” Jaitley said. 

Top officials in the government made it clear that the Centre would not support OMCs in absorbing these costs.

Petrol prices were decontrolled in India in 2010, while diesel prices got market freedom in October 2014. The increase in fuel prices was advantageous to state governments, as states impose the value-added tax ad valorem, as percentage of the landed amount of the product, resulting in tax share fluctuations. On the other hand, the Centre was levying a fixed amount of Rs 19.48 a litre on petrol and Rs 15.33 a litre on diesel before Thursday’s cut. Now, the central duty has come down to Rs 17.98 and Rs 13.8, respectively.

“Through this move, the Centre is urging state governments to cut down on the windfall gains they have been making while crude prices moved from $65 to $85 a barrel. The impact of Rs 1.5 cut on excise revenue will be to the tune of Rs 105 billion for the remaining months of this fiscal, which will impact the fiscal deficit,” said Debasish Mishra, partner at Deloitte Touche Tohmatsu in India.

Experts agree that the imposition of VAT ad valorem will give states a decent comfort level to cut prices. “As a higher international price of crude oil and weak rupee have automatically given them higher revenue, a reduction in rate is possible. The windfall gains for states can accommodate this cut in duty with ease without disturbing the revenue collections,” said Madan Sabnavis, chief economist with Care Ratings.

“The move is positive, as it will placate prices and inflation. However, if the crude price continues to go up and the rupee falls, this will have only limited impact,” Sabnavis added.

Devendra Pant, chief economist with India Ratings, said the cut by the Centre, OMCs and state government would translate to a 3.79 per cent decline in retail prices of petrol and 3.88 per cent decline in retail price of diesel, based on prices and taxes prevailing in Delhi. “The impact of this retail inflation would be 9 basis points. A matching cut in VAT by state governments would result in retail inflation declining by 16 basis points,” Pant said.

Speaking to reporters while making the announcement, Jaitley said the decision to cut duties was taken because of uncertainty in the global crude oil markets due to lack of clarity over outlook in Iran and the oil producing nations. “Consumers should also know that we are net buyers of oil and buyers do suffer. We will try and see how the currency impact can be contained through the series of steps which we have taken or which we will take further so that there is some further relief over and above what we have proposed,” he said.

“We are not going back on deregulation because the oil companies will still continue to factor in price on a regular basis... Our ability to give relief will only be when our fiscal position is able to absorb it,” he said.