Govt may have to cut excise duty as price freeze hits oil firms' margins

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Marketing margins of oil companies have come under severe pressure with the government freezing the daily revision of petrol and diesel prices ahead of the Karnataka polls.

According to an industry source, the average marketing margin on petrol and diesel has gone down from Rs 3.5 a litre on April 1 to Rs 1.9 a litre on May 1 for Indian Oil Corporation (IOCL), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL), a drop of about 45 per cent. 

Interestingly, the average Indian basket crude oil price zoomed 8 per cent from $63.76 a barrel in April to $68.88 a barrel in May, while the domestic basket price was seen at $71.4 a barrel on Friday.

The Karnataka Assembly elections are scheduled to be held on May 12. 

The government stopped the hikes in fuel prices on April 23, when the international crude oil price was at over $74 a barrel. The price of Brent crude was $74.87 a barrel at one point on Saturday. For the last 13 days, prices of petrol and diesel have been static at Rs 74.63 a litre and Rs 65.93 a litre, respectively, in Delhi.  

For every $1 rise in crude oil prices, the impact on the current account deficit is around $1 billion. 
State-owned fuel retailers put in place an automated system last June to revise the prices of petrol and diesel on a daily basis, reflecting changes in international prices. 

“I believe the companies will be allowed to cover up for their losses after the elections. The freeze on prices will have an impact on the accounts of companies during the current quarter. However, with rising crude prices, at some point of time, the government may have to cut the excise duty on fuel,” said ICRA’s Senior Vice-President K Ravichandran. 

The Centre now levies excise duty of Rs 19.48 a litre on petrol and Rs 15.33 a litre on diesel. The government had gone in for a Rs 2 cut in the excise duty in October, which it claims has led to a revenue loss of more than Rs 130 billion on an annual basis. However, when international prices were 
low, the Centre’s share was increased nine times in a span of 13 months between November 2014 and January 2016.

The Centre has already asked states to slash their value-added tax on petrol and diesel. In the month of April, the average marketing margin was seen at Rs 2.97 and Rs 3.22 a litre for petrol and diesel, respectively. 

“During the Gujarat polls also, companies lost more than Rs 1.5 a litre on marketing margins, which the government allowed them to recover later. So, I don’t think this will be a huge financial burden on companies on an annual basis,” said a Mumbai-based analyst.  
“With improvement in the political scenario in North Korea and increase in shale supply from the US, there is likely to be relief on the pricing front,” Ravichandran said.

According to a report by CARE Ratings, with imports of 1,575 million barrels of crude oil on an annualised basis, a $1 increase in prices on a permanent basis will increase India’s yearly import bill by around Rs 100 billion, which is a major cause of concern for the government.

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