NEW DELHI: The spate of heavy fuel tax hikes effected by the Centre and state governments since March have finally begun to bite consumers. As on Friday, oil marketing companies (OMC) had hiked petrol and diesel prices by a sharp Rs 3.31 and Rs 3.42 per litre respectively through six consecutive rate increases starting Sunday.
Industry sources note that prices may rise by another Rs 1.5-2 per litre over the next few days as OMCs pass on the full impact of the Centre's excise duty hikes and factor in rising crude oil rates--these levies have been hiked by a sharp Rs 13 and Rs 16 per litre (on petrol and diesel respectively) since March 15.
While OMCs had kept prices unchanged since March 16 due to heavy volatility in global crude oil markets and a collapse in fuel demand, the situation has begun stabilising. “Crude rates have risen and domestic demand is back to around 70-75 per cent of the levels seen in February, so (OMCs) are passing on the duty hikes to preserve profit margins,” a senior OMC official told TNIE, preferring to remain unnamed.
Brent prices had dived from $68.91 per barrel (/bbl) in early January to a record low of below $16/bbl in April. However, steadily improving demand over May and June has seen prices climb back up to $39-40/bbl currently--around 30 per cent more than its March 16 level of $30 per barrel, but still over 50 per cent lower than in January.
This decrease has resulted in little to no benefit for consumers though--the gains funnelled away by the mammoth hikes in Central duties and lesser, but still substantial, increases in states’ VAT over the past half a year. For instance, petrol prices in Delhi are currently just 1 per cent lower (Rs 74.57/litre) than on January 6 (Rs 75.69/litre), even as crude oil rates stand reduced by over 50 per cent.
While both revenue-starved states and the Centre have hiked levies, the lion’s share of the tax burden comes from central excise duties. In the national capital, Central levies account for 44 per cent of the retail cost of petrol, while state VAT accounts for 22 per cent.
The situation is similar across states, with marginal variances due to differences in VAT rates.
While OMC marketing margins had stood at Rs 3.4/litre for diesel and Rs 9.2/litre for petrol in May after the Centre’s duty hikes, according to Motilal Oswal analysts, industry sources say the recovery in crude oil rates have led to these margins contracting sharply over the past month. “OMCs cannot absorb the full excise duty as crude prices keep rising… it will result in severe losses,” said another OMC official.
However, while an immediate duty cut is unlikely, experts believe that the Centre may be forced to reduce excise if crude prices continue on the upward path. If no cuts are forthcoming and crude prices rise back to above $50/bbl, sources say it may lead to unsustainably high retail prices and runaway inflation.