Crude Price Falls, But Govt Keeps Raising Excise Duty To Match

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The government has, for the third time in two months, raised excise duty of petrol and diesel by Rs. 2 each. This means there’s no change in the retail prices of petrol or diesel. (Effectively, Oil Marketing Companies have cut the prices of petrol and diesel, and the increased excise duty makes up for it)

The government has to do this on it’s deficit problem, which we explain as reaching gargantuan proportions as of November.

The analysis:

  • The input prices of crude oil have reached $53 per barrel. This is about half the $110 we used to pay earlier!
  • Petrol prices are supposed to be market linked but they obviously are not – from Rs. 80 the price has only fallen to Rs. 68.
  • There’s a 1000 cr. liters of petrol+diesel India consumes per month.
  • The government will earn Rs. 5.75 more for petrol (increase in excise) and Rs. 4.50 on diesel. That should help cut the deficit by Rs. 5,000 cr. per month. (big numbers!)
  • Even then, margins of oil marketers should be at least Rs. 2 to Rs. 3 per liter more – and they will earn Rs. 2000 cr. per month, at least, as excess margins.

And then the problem arises: are prices really free? We don’t see competition here, and the government is rejigging things all the time. The OMCs act like a cartel. There’s no real pricing freedom – either the government pushes losses on the OMCs or they decide to earn more profits as a cartel.

Crude prices could fall further, but on some random excuse we won’t see the benefit in lower fuel prices. The lack of clarity in fuel has driven the private retailers out of the business (with the exception of Shell, which doesn’t price much lower than the oil marketers either).

At some point, we should see the governnment privatize at least one of the big OMCs so that we can see real competition. If subsidy ever returns, we should be able to give it to private players as well.

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15 COMMENTS

  1. That is a gargantuan profit extracted due to the reason that ppl don’t complain back and demand answers. Where are the opposing voices ? If ‘Swacch Bharat’ and transparency is the essence of the agenda, where is it practiced in reality? Is there any law that permits govt to increase/decrease excise duty as per their whim? The effect I see that this type of discretion will make few export oriented manufacturing industries non competitive.

  2. Hah…Privitaisation of OMC will happen only in dreams or after 2 generations….Govt is simply taking away our money by increasing excise duty to cover up their forecast deficit mess.

  3. The issue can be seen from a different perspective.

    Reducing the price is not very difficult. But there will be a lot of hue and cry when one tries to increase the prices. This may be a way to manage rates when they can be controlled. This will help in coping up with increasing prices when the crude upward trend returns, which is to be expected in a short time. At the time of increase, simply reduce the excise duty and game can be sustained for some time.

    As such government is not profiting from the sale of petroleum products. There is a net deficit after accounting for cross subsidizing LPG, SKO. To overcome this, government is trying to bring in technology to target subsidies and reduce diversion of subsidized products.

  4. all those who feel unfair that prices havn’t reduced as much please look at all the below market prices you paid for many many years….

    • Not free of course, because we need more banks. RBI doesn’t cartel up to set rates – it basically sets rates on what it will charge banks to borrow from it. Then banks set rates for what they will borrow and lend onward.

      The free market is really in bonds. While RBI is lending to banks at 8%, banks are able to borrow from the market at 7.8%. Companies are able to borrow at even lower rates from the bond market than the banks will allow them as a loan.

  5. This is very good move by Gov. One of the best move ever since the Modi has been in power. This would not only help reducing deficit but also keep the price volatility low (though not much of an issue). This is a good move for the sake of environment as well. Car/LPG is not used by the poor; so Gov should make profit from those instead of subsidizing them.

  6. Excellent article! I am dumbfounded why modi/jaitley is doing this after claiming “minimum government”. Now that we are paying high taxes at least this money should go into buying more oil assets for cheap and securing our energy needs. I although am for decreasing the prices considerably so that we can build our infrastructure much more cheaply!

  7. I’m of the view that it’s better to keep the pricing this way to make sure they do not pollute the market. Reduced price means more consumption (Times are all gone when we keep the life style constant and return more monetary to savings)

    My opinion is that, reduce the essential commodity viz. LPG gas (more subsidy) and retain the non-priority sector (personal vehicle is a luxury and not an essential). Government should cash in through indirect taxes and pass on the benefit to priority section

    Cheers

  8. The article is spot on.Indian consumers will get 1/3 rd benefit of pricefall.1/3 rd will be pocketed by govts.Some state govts r too raising VAT rates and 1/3 rd which came from upstream oil cos like ONGC won’t be coming as at these levels they r not going to make profit anyways.

Comments are closed.