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The prices for the official Indian crude oil basket touched $69 on Thursday. If these prices continue to rise and disprove the government’s assumption of $65 a barrel average over 2018-19, two potential scenarios could play out.
Consumers will have to pay more for motor fuel (petrol or diesel). Retail prices have already gone up 4 per cent in a month. If this is the case, the government will earn the expected revenue through excise duties and value-added tax. Oil marketing companies (OMCs) will make profits according to their expectation.
This would keep retail prices stable.
If the government decides to go with the first option and oil over FY19 averages $75 a barrel, the retail price of petrol might reach Rs 78 a litre and of diesel Rs 69 a litre. In the second one, the government would have to reduce retail prices by Rs 4 per litre. Considering a 5 per cent rise in consumption of both fuels, the government and the OMCs stand to lose at least Rs 600 billion in revenue.
If oil averages $70 per barrel, they stand to lose more than Rs 300 billion in FY19.
With the general elections due next year, it is likely the government will choose the second scenario to not anger people. This will result in loss of budgeted revenue. The same is true of OMC profits.
Profit after tax for the three OMCs more than tripled from Rs 112 billion in 2014-15 to Rs 376 billion in 2016-17. In the first nine months of 2017-18, combined profits amounted to Rs 260 billion.
Assuming oil averages $65 a barrel in FY19, the government hopes to earn Rs 2.43 trillion from excise duties, according to the Budget documents. At $70, revenue from excise duties and cess is likely to fall to Rs 2.1 trillion. If oil prices rallies further to touch $75, the revenue would reduce to Rs 1.8 trillion.
The National Democratic Alliance government — that came to power in 2014 — gained a massive revenue boom from taxes on petroleum products, as against the United Progressive Alliance (UPA) rule, when the government spent its revenues in subsidies.
In February 2016, OMCs bought crude at Rs 1,760 per barrel (Rs 11 per litre), while retail petrol stood at Rs 60 per litre. The government earned Rs 21 per litre of petrol the OMCs sold.
Under the UPA rule in September 2013, OMCs bought crude oil at Rs 7,400 per barrel of oil (Rs 47 per litre) while diesel was priced at Rs 53 per litre in New Delhi. The government paid out Rs 15 per litre of diesel sold.