Political wink-and-nudge: OMCs took a hit on their margins even earlier

What Jaitley did on Thursday by asking them to absorb another one ruppe per litre was to increase that squeeze and make it formal

Even before Finance Minister Arun Jaitley’s announcement on Thursday that oil marketing companies will be asked to absorb another one rupee per litre, the margins of state-owned oil refineries were already under squeeze. What Jaitley did on Thursday was to increase that squeeze and make it formal.

From April 1 to October 1 this year, the difference in the petroleum products’ cost and freight (C&F) price for refineries and the price at which they were sold to dealers had already narrowed from Rs 4 to Rs 2 a litre for petrol and from Rs 4 to Rs 3 a litre for diesel. In other words, the refineries had already absorbed a margin hit Rs 2 a litre for petrol and one rupee a litre for diesel in the last six months. Thursday’s announcement has increased the margin squeeze to Rs 3 a litre for petrol and Rs 2 a litre for diesel.

Equally significant, what had been managed in the last six months quietly has now been made public, presumably to tell the people and political classes that the government has acted by forcing a price cut on refineries.

According to data available with the oil companies, the C&F prices for petrol and diesel in April 2018 were Rs 31.08 and Rs 33.16 per litre, respectively. By October, these C&F prices for both the products went up to Rs 40.69 and Rs 43.9 a litre, respectively. This was an increase of about 31-32 per cent. However, the increase in the prices that refineries charged from the dealers in the same period was much lower at around 22-23 per cent. The dealers’ April prices of Rs 35.05 and Rs 37.31 a litre for petrol and diesel went up to Rs 42.79 and Rs 46.22 a litre, respectively, by October 1.

It is reasonable to assume that the refineries could not have volunteered to squeeze their margins. It is more likely they were gently pushed to absorb the higher costs. On Thursday, the finance minister made that gentle push public. Not surprisingly, the stock markets reacted adversely pulling down the prices of many listed oil refineries.

The cut in central excise will also have an impact on the Union government’s finances. But more worrying will be the impact on the finances of the few state governments that have announced a cut in their value added tax rates on petrol and diesel in response to the finance minister’s call. They are more dependent on revenues from petroleum products than the Centre, which in any case is seeing robust growth on direct tax collections, which may well take care of a part of the revenue loss to be incurred on account of the cut in excise duty on petrol and diesel.

A bigger cause for worry is that Thursday’s decision has made the goal of achieving transparency and rationality in the pricing of petroleum products by refineries even more elusive. Now that the margins have been squeezed, the oil refineries can hardly be pushed to introduce a cost-plus pricing formula that experts have been recommending for long.