Economy

Fuel price hikes likely with State polls coming to an end 

Shishir Sinha | Updated on: Mar 06, 2022

However, some relief by way of cut in duty cannot be ruled out

With voting coming to an end on Monday, get ready to pay more for petrol and diesel. This will be the first revision for petrol after November 04 in Mumbai, Kolkata and Chennai and diesel in all four metros.

“Revision can take place any time as early as on from the Tuesday morning,” a source said. In December, the Delhi government lowered VAT (Value Added Tax) for petrol, brought second revision after November 02.

In principle, public sector oil companies are free to revise prices of petrol & diesel every day. However, this may not be true in reality as there have been many instances when did not revise prices before voting, even if the Indian basket saw an increase. Even this time, Indian basket moved from $80 to $10,0 and now over $117 a barrel, still there have been no revisions. Oil companies are silent on why there is no revision, but it is believed informal directive from the political leadership has tied their hands.

Under-recovery

Sources say there is ‘under-recovery’ (retail price lower than cost) of between ₹7-10. They say various options are being mulled, including passing a part of higher crude prices to the consumer and a part to be compensated by cutting down central levies. Cut in central levies will lead to further reduction in effective duty in States as they impose VAT ad valorem (percentage of value) and the base for tax calculation will come down. Though the expectation is that States can also cut VAT, considering review conditions, they may not do so this time.

“If the government reduces the excise duty on petroleum products further by ₹7 per litre in March after election and prevent the prices of petrol and diesel from rising, then the government will incur excise duty loss of ₹8,000 crore a month. And if we assume that the reduced excise duty continues in the next fiscal and assuming petrol and diesel consumption grow around 8-10 per cent in Fiscal Year 2022-23, then the revenue loss of the government would be around ₹95,000 crore to ₹1 lakh for next fiscal,” a research report prepared by Economic Research Department of SBI said.

Though fuel directly has small share in the overall inflation structure, any revision will have lot of indirect impact on the prices of goods as road transport (mainly using diesel) has over 70 per cent share in overall logistics. That is why various research agencies predict the inflation rate to go up, and then there could be a revision in the interest rate at least in a near term

ICICI Securities, in its research report, said: “With headline inflation already slightly above its target range (and likely to remain above it in Mar-Apr), we believe that the RBI will be obliged to bring forward its rate increases. We now expect 50 bp (basis points, 100 bps mean one percentage point) of increases in the repo rate in Apr-Jul – whereas we were previously expecting those hikes to have come in Aug-Dec,” it said.

Published on March 06, 2022
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