For the first time, fuel prices will be market-linked from next month. It means prices at the pump will be automatically revised daily, upwards or downwards, depending on which way international crude rates move. After testing the waters in five cities, it will be rolled out across the country. Currently, rates are revised every fortnight based on the average global price in the preceding fortnight and the exchange rate. The proposed dynamic or real-time pricing may affect domestic fuel inflation as it constitutes a significant chunk of the Consumer Price Index basket.
For instance in March, higher fuel costs flared up headline inflation to a five-month high, vindicating RBI’s I-told-you-so-moment last week to keep repo rate on hold. Petrol and diesel prices were deregulated in 2010 and 2014 respectively, but oil companies, guided by political considerations, did not revise rates at will or based on need. With daily changes, the backdoor influence can be eliminated. This augurs well for state-run oil marketing companies like IOC, HPCL and BPCL that incur huge losses on account of non-revision of prices on par with global rates.
For consumers, the price volatility may not be much, as central and state taxes account for a major part of the fuel prices, accounting for half the retail price of petrol and 46 per cent of that of diesel. Indians were one of the few who lost out on last year’s historic crude price fall. Crude fell as low as `21 per litre last year, but the government, instead of passing on the benefits, played smart increasing excise duties and pocketed handsome indirect collections as receipts from petrol and diesel jumped 20 and 36 per cent respectively in FY17.
The incoming GST gives little respite as petroleum is out of its ambit and with volatility in global prices stabilising, prices may head north. This will pinch consumers and unless the government lowers the tax component, market-linking of prices may not yield any benefit as it’s like shaking hands with one hand tied at the back.