Fuel Price Hike – Does Jaitley have a Plan B?


Petrol prices have been hiked again by Rs. 2.5/ litre. The reason given is crude oil prices have inched up and rupee has weakened during the last month. This reminds me of an adage “chit bhi meri, pat bhi mera”. When crude prices were declining, government did not pass on the benefits to end consumers by filling coffers through excise duty. The lazy excise money enabled govt. to maintain the fiscal deficit at 3.9% and keep the rating agencies happy.

Currently 39% of total price in Delhi is only raw material related (crude oil), 33% is excise duty (central govt. revenue) and 21% is VAT (state govt. revenue). 7% is petroleum company and dealer margins. Govt. strategists feel these small increases, may not pinch the middle class hard enough to make it angry and vote against Modi in 2019. In addition there is the TINA factor.

Murmurs have started in social media among first time and young voters who backed Modi in 2014. People are unhappy with these frequent increases. When govt. did not pass on the decline in prices to end consumers it can’t give the reason of increase in global prices now. They feel cheated.

Petrol prices were Rs. 71.4/litre on 26th May 2014 when Modi assumed office. Today it is Rs. 65.6/litre (-9%). Crude oil prices have reduced by 57% since May 26, 2014. Even after taking rupee depreciation in account (-14%), a barrel of crude costs 49% lesser today compared to May 2014. This means petrol prices should have declined by 49% to Rs. 36/litre (Rs. 30/litre lesser than today). This leaves the common man baffled.

Index of components of Petrol Price (26 May 2014 & 31st May 2016) – Base 100

petrol1.png

What if tomorrow oil prices reach $110.3/bbl (currently $48.7/bbl), same levels as on the day Modi took oath. Going by the current logic (assuming constant exchange rate and excise duty) price of petrol will increase to c. Rs. 100/litre. This is insane and assumes Jaitleyji doesn’t become greedier and increase excise duties again.

Some may argue, crude prices are not expected to go back to USD 100 / bbl levels, so this exercise is theoretical. Nobody can predict prices accurately. Nobody predicted it will fall to USD 40 / bbl levels. And in MBA we have all done scenario analysis, worst case scenarios.

petrol2.png

Even Jaitley knows it will all be fine till prices are increased upto Rs. 71.4 / litre levels when NDA II took charge. After that, he may not have the luxury of increasing prices. Then what does he do. The only way prices can be contained is:

  • Decrease of excise duty or
  • Not allowing OMCs to increase prices

If excise duty is reduced, it will impact govt. revenue and increase fiscal deficit. If petroleum companies are not allowed to increase prices, they will incur losses / under-recoveries and govt. will need to compensate them with subsidies. This will increase govt. expenditure which means Jaitley will need to raise resources through some other taxes, so if petrol prices don’t increase, be ready for some innovative cess / tax / broadening of service tax etc.

Jaitley could have missed a trick at such low crude prices. He should have taken risk and left more money in consumer’s pocket. At current prices, roughly Rs. 160,000 crores annually could have been the aggregate reduction in petrol / diesel bill of India. This is a significant amount (3% of total private consumption expenditure and 1% of GDP). Consumption has a spiraling effect on Indian economy and would have contributed significantly to the GDP.

Govt. strategists need to fix this soon, else it has the possibility of ballooning into a controversy like Provident Fund and loss of votes.

 

 

 

       
         
         
         
         
         
         

 

 

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