India to save Rs 2 lakh cr on crude imports as oil hits 11-year low

Price benefit to be passed on to consumers in retail rates provided excise duty is not hiked, Oil retailers say

With the Indian basket of crude oil price plummeting to an 11-year-low of $37.34 a barrel, the country is set to save Rs 2.14 lakh crore on its oil import bill alone in FY16, according to the oil ministry. This is in addition to the benefits to the government in the form of lower petroleum subsidy and expected cuts in fuel prices for consumers.

The price of the basket of crude that India buys, came down to $37.34 (Rs 2,494) a barrel on Tuesday, on an exchange rate of Rs 66.8 a dollar, a 3.2 per cent decline over Monday’s price of $38.61 a barrel.

Experts say there is a possibility of the oil prices breaching the record levels in a day or two and take a long time to recover from the low levels thereafter, given the refusal by the Organization of Petroleum Exporting Countries (Opec) at a meeting in Vienna last week, to impose a fresh cap on production by member nations creating a supply glut.

The ministry has estimated India will import 188.23 million tonne (mt) of crude oil in FY16 at a cost of Rs 4,72,932 crore, compared to 189.43 mt crude worth Rs 6,87,416 crore imported in FY15, saving Rs 2,14,484 crore on fuel bill.

The government’s calculation is based on estimated average crude oil price of $55 a barrel for the rest of the financial year, till March 2016, and an exchange rate of Rs 65 a dollar. Experts say even this could be an overestimate. “Global oil price has averaged at $55 per barrel up to October and is estimated to be in the $40-45 per barrel range for the rest of FY16,” said K Ravichandran, senior vice-president at ICRA.

He attributed the price to slump to the “severe supply pressure” owing to Opec’s decision, but said prices might not sustain at the current level for long. “At a price level lower than $40 per barrel, it becomes difficult even for large producers to sustain operations. So, the supply pressure will ease soon,” he said. Every $1 per barrel change in the crude price will impact India’s net import bill by $0.54 billion (bn) during the rest of FY16.

According to ICRA’s estimate, average Indian basket price of crude is likely to stand at $49 a barrel in FY16 compared to $84 a barrel in FY15. Ravichandran says the difference translates into $35 a barrel or a total of $48 bn savings on oil imports. The value of India’s oil imports would stand at $65 bn in 2015-16, compared to $113 bn in FY15.

Since June 2014, the global oil price benchmark Brent crude has fallen by 60 per cent, from $110 a barrel to less than $40 a barrel. However, domestic petrol prices have come down by only 15 per cent, to Rs 60 a litre. Similarly, the retail price of diesel has come down by 19 per cent from Rs 57 a litre in June 2014 to Rs 46 a litre.

The main reason why the drop in petrol and diesel prices has not kept pace with the crash in global crude prices is the five excise duty hikes since November 2014 to increase revenue collection. Excise duty on petrol and diesel has doubled since the new government came to power in May 2014.

The duty on petrol has risen from Rs 9.48 per liter to Rs 19 per liter. Similarly the excise duty on diesel has gone up from Rs 3.65 per liter to Rs 10.6 per liter at present. "As per our estimates, there is a further possibility of increase in excise duty. There is room for the government to opt for another round of duty hike given the deficit on disinvestment proceeds and tax collections. However, some benefit could still be passed on to consumers as the decline in crude price has been sharp," Ravichandran said.

 

A senior executive from Indian Oil Corporation (IOC) said the benefit of the huge decline in crude prices would be "definitely" passed on to the consumers when retail rates are revised next on 15 December. He added that the reduction would, however, depend on whether the centre opts for another round of duty hikes.