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Mint Primer: After the freeze: will we soon get a petrol price cut?

Petrol and diesel prices were deregulated in India in 2010 and 2014, respectively.  (AFP)
Petrol and diesel prices were deregulated in India in 2010 and 2014, respectively. (AFP)

Summary

  • With the Centre netting buoyant tax revenue and global crude prices benign, can consumers hope for a cut in the run-up to the elections next year?

NEW DELHI : Domestic pump prices of petrol and diesel have remained unchanged since May 2022, the longest freeze in India. With the Centre netting buoyant tax revenue and global crude prices benign, can consumers hope for a cut in the run-up to the elections next year? Mint explains.

How have global crude oil price been doing?

They have oscillated wildly following multiple geopolitical crises. The start of the Ukraine war in early 2022 saw prices shoot past $100 per barrel in the summer of 2023 but it stabilized below $90 per barrel after the initial shock. In the second quarter of 2023, prices softened to less than $80 per barrel but started inching upward again, after Organization of the Petroleum Exporting Countries and Russia announced supply cuts in June and August. The recent Israel-Palestine conflict led to fears of prices breaching the $100 per barrel mark but they have, instead, declined to hover around $80 per barrel over the last month.

Why have pump prices not changed?

Petrol and diesel prices were deregulated in India in 2010 and 2014 respectively and prices are supposed to be market-linked and revised on a daily basis. But in reality, that hasn’t happened. The government has hiked excise duties on both fuels over a dozen times between financial years 2015 and 2021, which meant consumers did not benefit from low oil prices between FY2018 and 2021. But as crude prices surged after the covid epidemic, pump prices did not move up either and state-run oil marketing companies (OMCs) bore the brunt. The current freeze in prices reflects the continual adjustment in margins of OMCs.

Graphic: Mint
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Graphic: Mint

What is the break-even point for OMCs?

All else (like the value of rupee against the dollar) remaining constant, at current pump prices, OMCs break even when global crude oil prices are $85 per barrel. Anything less and their profitability grows, increasing the chances of a cut in pump prices for the consumers. At the same time, any increase makes them unprofitable and strengthens their case for a price hike.

How dependent is the Centre on oil revenue?

Central and state governments generate revenue from oil through duties, cesses, royalty and VAT. The centre also earns dividend from public OMCs as well as corporate/income tax. In FY23, the centre earned 4.3 trillion while states made 3.5 trillion. With the hike in excise duties and VAT rates over the last few years, the revenue for the government has risen over 30% between FY19 and FY23. Petroleum accounted for over 17.5% of the centre’s revenue in FY23 while for states, it was 15% of their budget.

Is there a case for a fuel price cut?

Despite the unstable geopolitical scenario and the hawkish oil producers, global oil prices are not expected to shoot in the winter. Add to that government’s robust tax revenue this year—up 16% in the first half of FY24 against a budgeted 10%—and there is less pressure to shore up more capital or offset shortfall from elsewhere. Following a price cut in August, the centre hiked the sop on LPG cylinders in October signalling it may not be averse to a cut in fuel prices too. It may happen closer to the general election next year.

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