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Explained: Centre cuts excise duty on petrol, diesel. Could prices come down more or will they rise again?

With the excise duty cut alone, the effective retail price of petrol will be reduced by around Rs 9.5 per litre and of diesel by Rs 7 per litre.

May 21, 2022 / 09:18 PM IST
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The central government on May 21 announced a reduction in the excise duty levied on petrol and diesel to give relief to consumers reeling under the pressure of high fuel prices.

Finance Minister Nirmala Sitharaman said that the central excise duty on petrol will be reduced by Rs 8 per litre, while that for diesel will be reduced by Rs 6 per litre. She also asked states to consider cutting the taxes.

Consumers breathe a sigh of relief, but could the overall prices come down more or is this just a small breather? This explainer attempts to answer all this and more.

The Action

The central government has reduced the excise duty and hopes that states will follow suit. Duties and taxes account for 40-50 per cent of retail fuel prices.

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“I wish to exhort all state governments, especially the states where the reduction wasn’t done during the last round (November 2021), to also implement a similar cut and give relief to the common man,” the Finance Minister said.

With the excise duty cut alone, the effective retail price of petrol will be reduced by around Rs 9.5 per litre and of diesel by Rs 7 per litre. If states cut taxes, they may come down further.

The government has also announced giving a subsidy of Rs 200 per gas cylinder, for up to 12 cylinders, to over 9 crore beneficiaries of Pradhan Mantri Ujjwala Yojana.

The Context

Typically, Oil marketing companies (OMCs)– Indian Oil Corporation Ltd (IOCL), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) revise retail petrol and diesel prices daily, based on the rolling average of international benchmark prices over the past 15 days. But they left it unchanged for almost 137 days despite the benchmark crude oil prices soaring to a 14-year high of $140 a barrel in early March.

The government has time and again reiterated that the prices of petrol and diesel are market-determined with effect from June 2010 and October 2014, respectively, as their prices are being decided by the OMCs. But the OMCs' decision to leave the prices unchanged even as the Brent crude futures surged triggered speculations that they were frozen due to the ongoing state elections in the period.

The OMCs resumed increasing the price of petrol and diesel from March 22 and increased it 14 times until April 6. They increased mostly by 80 paise a litre per day totalling an overall increase of around Rs 10 per litre.

The centre will lose Rs 1 lakh crore a year due to the excise duty on fuel, and another Rs 6,100 crore a year due to the subsidy announced for the beneficiaries of the Pradhan Mantri Ujjwala Yojana.

Will states follow?

Prior to the excise duty cut announced on May 21, the government cut the excise duty on petrol by Rs 5 per litre and on diesel by Rs 10 per litre on November 4 when crude oil prices were at about $80 a barrel at that time.

At the time, most states ruled by the Bharatiya Janata Party (BJP) slashed the value-added tax by different degrees taking a cue from their party’s government at the centre. Most states which are governed by opposition parties refrained from reducing taxes; the Aam Aadmi Party government in Delhi cut it but only in December.

The tax on fuel accounts for a significant part of the state’s revenue and letting go of it in parts would be a tough call, economically and politically, for states.

What will OMCs do?

After increasing prices for fuel between March 22 and April 6, the OMCs have remained mum but the further price increase is inevitable.

Their decision not to increase the prices in the first quarter has been reflected in their financial result. Two of the three state-run OMCs–IOCL and HPCL– have so far reported their financial result for the quarter ended March; both made losses on retail sales of auto fuel, which led to their overall profit declining in the fourth quarter despite a robust performance from their refineries. BPCL is scheduled to announce its result soon.

Traditionally, bulk buyers enjoyed cheaper rates than retail consumers. But a series of increases in bulk high-speed diesel (HSD) prices even as retail prices remained unchanged has resulted in a reversal of the trend. Despite the recent increases in retail prices, the gap between retail and bulk prices remains high and has led to some bulk consumers lining up at retail stations to buy cheaper fuel and is causing disruption at petrol pumps.

The Consortium of Indian Petroleum Dealers (CIPD) said in a letter dated May 20 that dealers are being pressured by OMCs not to sell more than usual volume through retail pumps as they are incurring losses on retail sales.

“The reasoning given for this curtailed supply measure is that the OMCs are losing Rs 28 per litre on diesel and Rs 8 per litre on petrol. We are advised to restrain sales to new customers and cater to only our existing customers,” the consortium said in the letter.

The OMCs may view the excise duty cut as a buffer for the retail price and may resume increasing prices again as crude oil prices are unlikely to cool off given the geopolitical tension globally and they may not be able to absorb more losses from the fuel retail business.

So while the price of petrol and diesel will come down on the centre’s announcement, whether they come down more will depend on the states even as the OMCs need to increase prices to reduce the loss on retail fuel sales will continue to have an upward pressure on overall prices.
Rachita Prasad heads Moneycontrol’s coverage of conventional and new energy, and infrastructure sectors. Rachita is passionate about energy transition and the global efforts against climate change, with special focus on India. Before joining Moneycontrol, she was an Assistant Editor at The Economic Times, where she wrote for the paper for over a decade and was a host on their podcast. Contact: rachita.prasad@nw18.com
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