IOC says oil PSUs froze fuel prices to avoid consumer pain

With oil PSUs deciding not to hike petrol and diesel prices ahead of Karnataka elections, IOC Chairman Sanjiv Singh today said the company has decided to "temporarily moderate" prices to avoid sharp spikes and panic among consumers.

State-owned oil firms have since April 24 not changed petrol and diesel prices despite benchmark international product rates going up by nearly USD 3 per barrel.

Separately, Oil Minister Dharmendra Pradhan said the government has nothing to do with fuel pricing after it deregulated and gave PSUs freedom to fix retail rates.

Singh however indicated that retail prices will rise if the current trend in international oil prices continues. Karnataka goes to polls on May 12.

"We have decided to temporarily moderate retail prices by not passing on the required increase as we believe the current international oil product prices are not supported by fundamentals. So we have decided to wait for a while," Singh told reporters on sidelines of an industry event here.

The freeze in fuel prices follows the finance ministry's refusal to cut excise duty to give relief to the common man after petrol hit a 55-month high of Rs 74.63 a litre and diesel touched a record high of Rs 65.93.

"We can pass on daily spikes based on the freedom we have to revise prices on a daily basis. But we believe the surge in international oil products market is not supported by fundamentals and passing them on to consumers will unnecessarily create panic," Singh said. "So we moderate to a certain extent so that peaks are avoided."

Asked about all the three PSU oil firms fixing retail rates in tandem, he said it was possible that all of them thought that the spike in international oil prices is not supported by fundamentals and needs to be moderated.

Petrol and diesel prices have not changed since April 24. This is despite the benchmark international rate for petrol going up from USD 78.84 per barrel, which was used for raising the price to Rs 74.63 a litre on April 24, to USD 81.61 now, according to sources privy to fuel pricing methodology.

The benchmark international diesel rates during this period have climbed from USD 84.68 per barrel to USD 87.14. Also, the rupee has weakened to Rs 66.62 to a US dollar from Rs 65.41, making imports costlier.

Shubhada Rao, Chief Economist, Yes Bank, said hardening of international crude oil price is likely to manifest itself via higher pressure on India's twin deficits along with inflation while also having a marginally negative spillover on overall growth momentum.

"A 10 per cent increase in oil price could potentially increase headline CPI inflation by 0.2-0.3 per cent, increase CAD/GDP ratio by 0.3 per cent, and lower overall GDP growth by 0.1 per cent. The final impact on fiscal would depend upon the degree of discretionary fiscal adjustment encompassing both non oil revenue and non oil expenditure," Rao said.

Pradhan had last month denied reports of a directive to state oil firms to absorb at least Re 1 a litre hike by not raising prices in line with cost.

The prices at petrol pumps of state-owned fuel retailers like Indian Oil Corp (IOC) were cut by 1-3 paisa every day in the first fortnight of December 2017 before Gujarat went to polls.

They started moving up immediately after polling for assembly elections in Gujarat concluded on December 14, leading to speculation that government may have asked oil companies to hold on to the prices.

State-owned oil companies in June last year dumped the 15-year old practice of revising rates on 1st and 16th of every month and instead adopted a dynamic daily price revision to instantly reflect changes in cost.

If this practice was followed in letter and spirit petrol and diesel prices should have been increased by 60-80 paisa a litre in last fortnight, an analyst tracking the sector said.

The government had in June 2010 freed petrol price from its control and the diesel rates were deregulated in October 2014. Prices have since then moved more or less in tandem with international rates barring a few exceptions like the period before a crucial election.

Finance Secretary Hasmukh Adhia and Economic Affairs Secretary Subhash Garg have in the past weeks ruled out any immediate reduction in excise duty to cushion the increases warranted from a spike in international oil price.

The BJP-led government had raised excise duty nine times between November 2014 and January 2016 to shore up finances as global oil prices fell, but then cut the tax just once in October last year by Rs 2 a litre.

The government had between November 2014 and January 2016 raised excise duty on petrol by Rs 11.77 a litre and that on diesel by Rs 13.47 per litre to take away gains arising from plummeting global oil prices. This led to its excise mop up more than doubling to Rs 2,42,000 crore in 2016-17 from Rs 99,000 crore in 2014-15.

The central government had cut excise duty by Rs 2 per litre in October 2017, when petrol price reached Rs 70.88 per litre in Delhi and diesel Rs 59.14. Because of the reduction in excise duty, diesel prices had on October 4, 2017, come down to Rs 56.89 per litre and petrol to Rs 68.38 per litre.

However, a global rally in crude prices pushed domestic fuel prices far higher than those levels.