Oil-marketing companies (OMCs) are likely to pay the price of the government’s desire to correct fiscal health by levying higher excise on petrol and diesel. Within a span of three weeks, the excise duty on petrol has been raised by Rs 3.75 a litre and that on diesel has risen by Rs 2.5 a litre.
An increase in duty on the two automobile fuels means OMCs will have to take a hit of over Rs 10,000 crore in the rest of the financial year, since they offset the duty hike against margins on retail prices.
On an annual basis, the first duty hike in November would give the government an additional Rs 13,000 crore. From the twin hikes in excise duty, the government is poised to raise up to Rs 20,000 crore annually. The huge amount would help the government limit fiscal deficit to 4.1 per cent of gross domestic product in the current financial year.
The burden of the excise duty hike would not be passed on to consumers as it was meant to meet the revenue deficit, Petroleum Minister Dharmendra Pradhan said at an event on Wednesday. He added the fall in international oil prices had resulted in six consecutive reductions in petrol and diesel prices. “The government had to take certain steps to meet the revenue deficit without burdening the consumer. If international oil prices continue to fall, the benefit will certainly be passed on to consumers,” said Pradhan.
Thanks to an oversupply in the global markets, along with a slump in demand, crude oil prices have fallen to four-year lows.
The Indian basket of crude oil has declined nearly 40 per cent from its June peak of $115 a barrel to $72 a barrel. Brent crude futures have also declined by the same extent during the period. However, petrol prices have been slashed only 11 per cent, and diesel prices have come down by eight per cent.
According to OMC executives, the last two excise duty hikes have not been passed on to consumers and retail price revisions have been done keeping the government’s decision of excise duty hikes in view. “We revised petrol and diesel prices only last Sunday. We will take an overall view of crude oil rate and excise duty while revising prices next,” said a senior executive at the country’s largest fuel retailer, Indian Oil Corp (IOC).
He added the latest excise duty hike of Rs 2.25 a litre on petrol and Re 1 a litre on diesel would translate into a hit of Rs 4,500 crore for OMCs in the rest of the current financial year. “The last duty hike, on November 13, had an impact of Rs 6,000 crore on OMCs,” he said.
The petroleum sector annually contributes Rs 3.05 lakh-crore to the exchequer; this includes Rs 1.52 lakh-crore to the Centre and an equal amount to states.
The contribution to the central exchequer is in the form of cess on crude oil, royalty, Customs duty, excise duty, service tax and dividend paid to the government. The Centre’s excise duty collection from the petroleum sector rose from Rs 68,000 crore in 2011-12 to Rs 77,000 crore in 2013-14.
The Centre managed to mop up Rs 16,000 crore from excise duty in the petroleum sector in the first quarter of the current financial year. With two consecutive hikes in duty in less than a month, the collection is set to swell further.
For OMCs, their largest shareholder’s drive to boost excise duty collections could not have come at a worse time. All the three state-owned refiners — IOC, Bharat Petroleum Corp and Hindustan Petroleum — had seen sequential drops in their gross refining margins during the September quarter, as falling crude oil prices led to inventory losses.
IOC reported a net loss of Rs 898 crore in the July-September quarter of 2014-15, against a net profit of Rs 1,683 crore in the year-ago period.
This was mainly due to an inventory loss of Rs 4,272 crore in the quarter, compared to an inventory gain of Rs 4,635 crore in the corresponding quarter a year ago, said IOC Chairman & Managing Director B Ashok.
The firm’s gross refining margin stood at a negative $1.95 a barrel during the September quarter, against a positive margin of $7.43 a barrel in the year-ago period.