You are here: Home » Economy & Policy ยป News
Business Standard

Modi govt's crude oil party finally over?

Petrol, diesel prices near pre-crash levels

Sudheer Pal Singh  |  New Delhi 

Image via Shutterstock
Image via Shutterstock

The Narendra Modi government’s crude oil party might be finally getting over.

Thanks to the 80 per cent slump in global crude prices between June 2014 and January 2016, the Centre had the leeway of raising excise duty on petroleum products. Thus collecting Rs 1.11 lakh crore in the first nine months of 2015-16, against Rs 99,000 crore in all of 2014-15.testing.. we are here....

Also, oil marketing companies’ collective profits jumped 65 per cent to Rs 13,090 crore in 2015-16, while consumers gained through reduced retail prices of petrol and diesel.

All of that could soon become history. The price of the Indian basket of crude oil jumped as much as 78 per cent to cross $50 a barrel last week, from a multi-year low of $28 in January. After the OMCs’ latest round of revision in retail prices, taking effect on Wednesday, petrol is Rs 65.6 a litre. This level was earlier seen in October 2014, around the time global crude price benchmarks started crashing, and two months after the Modi government assumed charge.

On Tuesday, the OMCs had announced a steep Rs 2.58 a litre hike in petrol prices, to align domestic with global prices. Also, diesel prices have been raised by Rs 2.26 a litre to Rs 53.93, earlier seen in November 2014. The price of both automobile fuels have, therefore, returned nearer the level when the oil price crash set in, even as the Indian basket of crude is hovering at $47 a barrel, well below the October 2014 price of $86.

The Centre had raised the excise duty on petrol and diesel five times between November 2015 and January 2016. It argued the idea was to create a price cushion for consumers when crude started rising in the future; also that excise duty collection is important for creating rural infrastructure, including roads. After the changes, the basic excise duty on petrol went up 34 per cent to Rs 9.48 a litre and on diesel rose two and a half times to Rs 11.33 a litre.

No wonder the petroleum sector’s contribution to the central exchequer in the form of oil levies ballooned to Rs 1.34 lakh crore in the first nine months of 2015-16, from Rs 1.26 lakh crore in all of 2014-15. The collection from excise duty alone jumped to Rs 1.11 lakh crore in the first nine months of FY16, from Rs 99,184 crore in all of 2014-15.

For the OMCs, apart from elimination of underrecoveries, the sharp drop in crude prices brought a bonanza in the form of higher profits. Indian Oil Corporation (IOC), the largest fuel retailer, reported a net profit of Rs 10,399 crore, nearly double of the previous year’s Rs 5,273 crore. Bharat Petroleum's (BPC’s) jumped 46 per cent to Rs 7,431 crore and Hindustan Petroleum (HPC) reported a 41 per cent increase in profit to Rs 3,862 crore.

Experts say if the global crude price averages at the current $50 a barrel, OMCs’ gross underrecoveries (GURs) are likely to be Rs 39,000 crore in 2016-17. The government is budgeting for a total petroleum subsidy of Rs 26,900 crore for the year. “If the crude price were to increase to $60 a barrel and $70 a barrel, GURs should increase to Rs 51,000 crore and Rs 63,000 crore, respectively,” said K Ravichandran, senior vice-president at ratings agency ICRA.

If the government retains the current subsidy sharing formula, whereby OMCs’ loss of up to Rs 12 a litre in kerosene and Rs 18 a kg for cooking gas are borne by the government and the rest by upstream firms, the subsidy requirement would be Rs 35,000 crore at an average crude price of $50 a barrel. According to ICRA, the Centre’s budgeted subsidy would be sufficient only up to a crude price of $45 a barrel.

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Thu, June 02 2016. 00:45 IST