As global oil prices barrel-roll towards fresh highs, India's bailout boys, aka excise duty cuts, are back in action.
On Friday, the government slashed excise duties for petrol and diesel by Rs 10 per litre each, bringing them down to Rs 3 per litre of petrol and zero for a litre of diesel.
The duty cuts, amid surging global oil prices and supply shortages owing to the Iran war, have set off expectations of lower domestic fuel prices.
In reality though, pump prices may not fall. They may not see an immediate price rise either, which in itself, is a bonanza given what's happening in neighbouring Asian and European economies, who were quick to pull the price trigger.
According to Globalpetrolprices, China, Pakistan, Sri Lanka, and Japan have all seen petrol prices rise anywhere between 19% and 34% in the past few weeks, while others like the Philippines, Thailand are hauled into the sick bay and as supplies continue to deplete, they are struggling just to make it from one day to the next.
As Hardeep Singh Puri, Union Minister of Petroleum and Natural Gas noted: "International crude prices have gone through the roof in the last month, from around $70 per barrel to around $122 per barrel. Consequently, petrol and diesel prices for consumers have gone up all over the world. Prices have increased by around 30 to 50% in South East Asian countries, 30% in North American countries, 20% in Europe, and 50% in African countries."
In contrast, India took its sovereign sentiment to heart, as it often does in times of crisis, to absorb the price shock. As Puri reasoned, keeping with the commitment of last four years, since the conflict in Russia-Ukraine started, the government will take a hit on its own finances again to safeguard citizens.
Still there was no joy on Dalal Street. Instead, it met the Friday morning announcement with shrugs as Sensex and Nifty took a 1,300 and over 340-point drenching on global cues. In fact, markets have been reacting, perhaps, more fiercely than even war room generals and have lost an estimated Rs 32 lakh crore in market capitalisation just this month.
The 10-year Treasury yield too went galloping 6.9% -- its highest level in 20 months -- while the five-year yield was up 4 bps at 6.64%. Rates jump when the bond market eyes inflation ahead. Rising fuel prices means the inflationary hammer comes hammering down and the timing cannot be worse. That's because, the RBI barely managed to anaesthetise the inflation monster back in the barn, but the war-led oil price rise is forcing global central banks to have their binoculars out looking for inflation. Such an eagle eye is highly needed to act swiftly if households are seen ingesting too much salt to swallow higher prices or if economic growth gets blistered and burnt unduly.
So the wait-and-watch approach to policymaking made a comeback last week, when five of the world's major central banks namely, the US Federal Reserve, European Central Bank, Bank of England, Reserve Bank of Australia, and the Bank of Japan, paused rate cuts. The spotlight is now on the RBI, which meets next month to decide its policy direction. India too is facing headwinds with the rupee depreciating to 94, crude crossing $100 per barrel, and the 10-year G-Sec yield hitting indecent highs. Just a few weeks ago, a consensus about an April rate cut was thick like skin on a rice pudding, but that prospect is slowly vanishing.
That brings us to the question of how and who the excise cuts will benefit. Currently, Oil Marketing Companies (OMCs) are losing Rs 48.8 per litre of petrol or diesel sold as they are absorbing the rise in global crude prices. Since Indian oil imports are priced in dollars, our volatile exchange rate is compounding the problem.
Taking into account the global crude oil price of about $95 per barrel (which is approximately 159 litres) and the current exchange rate of 94, the price per litre translates to approximately Rs 56. But fuel is sold at over Rs 100 per litre including the cost of refining, freight, central excise duties and state VATs, dealer commissions and OMC margins.
Prior to Friday's cut, central excise duty stood at about Rs 24-30 per litre for petrol and diesel, including basic excise duty, special additional excise duty, and road and infrastructure cess. And as Puri explained, by foregoing the excise duty revenue, government is taking a huge hit on taxation revenues to compensate the losses of oil companies.
He didn't say how much the duty cuts would cost, but analysts are quick to peg the annual fiscal hit somewhere around Rs 1.55 lakh crore to Rs 1.6 lakh crore, while absorbing about 30%-40% of annual losses of OMCs.
Meanwhile, the diesel export tax was set at Rs 21.5 per litre as well as a Rs 29.5 per litre tax on the export of aviation fuel. According to Finance Minister Nirmala Sitharaman, this would ensure adequate availability of these products for domestic consumption.
With duty cuts, the government may have signalled its willingness to intervene when needed even at the risk of straining public finances. But critics aren't convinced as the move deceptively comes ahead of the forthcoming assembly elections next month and given voters everywhere are often sensitive to higher prices.
The obvious question is if the government will continue to shoulder the price rise burden in May or June if global prices continue to flare?