NEW DELHI: The past eleven days have witnessed one of the steepest hikes in retail fuel prices in history—petrol and diesel rates rising by Rs 6.02 and Rs 6.4 per litre over 11 straight price hikes. Oil marketing companies (OMC) have raised prices everyday starting June 7, having kept them unchanged since March 16.
The primary reason for the steep price increase is the mammoth Rs 13 per litre and Rs 16 per litre hike in central excise duties fuel imposed since mid-March. With higher crude prices now pressuring OMC marketing margins, they have finally begun passing along the duty hikes to consumers. While OMCs had done so immediately when several states had hiked VAT during the period, this was not the case for the excise hikes.
Indians now pay around 230 per cent tax (including central excise + State VAT) on the base price of petrol, and over 210 per cent on diesel. In Delhi, for instance, while the base price of petrol is Rs 22.11/litre, excise duty charged is Rs 32.98/litre while state VAT is Rs 17.71/litre.
Extra tax revenue
For the cash-strapped central exchequer, however, TNIE estimates indicate that hiking levies has resulted in additional earnings of between Rs 15,950-16,570 crore for the March 15-May 31 period. For the full fiscal year 2020-21, these additional revenues are likely to come in at between Rs 1.4-1.7 lakh crore after accounting for steadily rising demand.
According to government sources, the Rs 3 per litre excise hike on petrol and diesel imposed from March 15 resulted in additional revenue of around Rs 2,300 crore during the last two weeks of the month. While excise duties remained unchanged during April, central levies were hiked again on May 6—becoming higher by a whopping Rs 10 (petrol) and Rs 13 (diesel) per litre.
Consumption data released by the Ministry of Petroleum’s Petroleum Planning and Analysis Cell (PPAC) shows that aggregate petrol and diesel demand crashed in April due to the lockdown—going from 7.8 million metric tonnes (MMT) in March to 4.22 MMT. But, subsequent relaxations have spurred demand during May, aggregate consumption rising to 7.26 MMT.
TNIE’s calculations based on PPAC’s fuel consumption data indicates that additional revenue collected during April and May is likely to be between Rs 13,650-14,270 crore.
“The excise hike was done with a target to garner Rs 1.55 lakh crore of additional revenue,” a government official told TNIE, adding, “generally, a hike of Rs 1 per litre adds about Rs 14,000 crore for the whole year, taking normal consumption”. Sources also say that the government may review the levies in the second quarter based on collections.
Oil companies protecting margins
The OMC's decision to hold back from cutting retail prices during the lockdown meant that gross marketing margins shot up to unprecedented levels—Rs 17-19 per litre—in April as crude oil prices hit rock-bottom.
However, global lockdown relaxations have steadily brought back demand and crude oil rates have firmed up. Brent crude, whose prices had dived from USD 68.91 per barrel (/bbl) in early January to a record low of below $16/bbl in April, is currently trading at over USD 40/bbl.
This has resulted in a sharp contraction in margins for OMCs even as fuel demand begins to pick up—gross marketing margins whittled down to less than Rs 2/litre before the current spate of price hikes.
Motilal Oswal analysts noted in a research note last week that both these margin levels were "irrational" when compared to the normal Rs 3 per litre. "Our belief was that this would definitely normalise again to a sustainable level for the full year..," they said.