New Delhi: India may cut taxes on crude oil and refined products in next year’s budget, the finance secretary said on Wednesday, to cushion the impact of rising global oil prices on inflation and state oil firms’ profits.
“All these issues on whatever be the duty structure will be considered in the run up to the budget,” Ashok Chawla said, adding if required, duties will be revised in the budget.
The government, already under attack from the opposition over a slew of corruption scandals and rising prices of essential goods, may want to cut taxes on retail prices to help counter the impact of increasing fuel costs and avoid voter anger.
Petrol prices were deregulated in June but the government still controls the price of diesel and liquefied petroleum gas (LPG) — key fuel sources for transport and cooking among India’s 1.2 billion population, many of whom live on under $1.25 per day.
In Delhi, taxes account for about half of petrol prices and a third of diesel prices.
Annual headline inflation in November eased to 7.48%, its lowest level in a year, but the Indian central bank has warned high global commodity prices remain a threat to inflation.
State-owned oil marketing companies increased petrol prices again recently and if the government hikes diesel prices too, it could put at risk the Reserve Bank of India’s end-March target for inflation of 5.5%.
Diesel accounts for a third of total fuel demand in the country and price pressures from a hike in diesel costs are typically transmitted to the broader economy through the transportation sector.
In this year’s budget the federal government restored the import tax on crude oil at 5% and raised factory gate taxes and import duties on petrol and diesel.
Chawla said the government was willing to compensate state-run oil marketing firms for a third of their revenue losses on the sale of refined products at cheaper rates in the current fiscal year, less than oil secretary S. Sundareshan’s estimates of at least 50%.
In June, India ended government curbs on petrol prices and raised the prices of diesel, cooking gas and kerosene. The changes sparked widespread protests against the coalition government led by the Congress party.
Indian oil firms last week raised petrol prices by about 5.6% as crude oil hovered near two-year highs, and a ministerial panel will meet on 30 December to consider increasing the prices of cooking gas and diesel.
Sundareshan said on Tuesday revenue losses at oil marketing firms — Indian Oil Corp, Hindustan Petroleum and Bharat Petroleum — on fuel sales in the current fiscal were estimated at Rs660 billion ($14.6 billion).
A 14.2 kilogram cylinder of cooking gas is currently sold at Rs345.35, about Rs275 below what oil firms estimate is the market price, while on a sale of a litre of diesel at Rs37.71 the companies suffer a revenue loss of about Rs6.50.
Sundareshan earlier said the government would pass only a part of revenue losses on diesel sales to consumers.
Increasing diesel and LPG prices would help the oil firms protect their margins.
Diesel and gasoline have a weighting of 4.67% and 1.09%, respectively, in the wholesale price index (WPI), India’s main inflation measure, and raising fuel prices has a knock-on effect as farmers and manufacturers pass costs along.
LPG carries a weighting of 0.91%.