Rising fuel prices: Will OMCs end up picking the tab?

With the Centre unlikely to reduce the excise duty on petrol and diesel, public sector oil marketing companies (OMCs) may have to absorb the rising crude costs to shield the consumer from further rise in retail fuel prices.

With crude on the boil — Brent has returned to above $60-per-barrel levels — retail prices have skyrocketed across the country. In Mumbai, petrol price, for instance, has surged 34 per cent year-on-year to hit ₹96.32 per litre on Thursday. Prices are expected to cross ₹100 levels in major cities if not checked.

“Ever since the economy was unlocked, OMCs have been reaping good realisations on account of low crude oil prices. And, considering how second and third quarters have been profitable for them, the OMCs can absorb some of the rise in crude prices and not passing it on as they have been doing all this while,” said Urvisha Jagasheth, Research Analyst at CARE Ratings.

Indian Oil, Hindustan Petroleum, and Bharat Petroleum earned stellar profits in the last two quarters,announcing interim dividends that buttressed the government’s coffers.

“The OMCs can reduce their marketing margins in order to make room to absorb the rise in crude prices,” said Prashant Vasisht, Vice-President and Co-Head, Corporate Ratings, ICRA.

That the government is not considering any reduction in the excise duty was made clear in parliament by Minister of Petroleum and Natural Gas Dharmendra Pradhan. The excise duty was hiked to unprecedented levels when the opportunity presented itself during the early days of Covid-19 as crude prices dipped, creating room for jacking up the already-high levy without raising the pump-price.

With a Covid-19 stressed exchequer, the government is compelled to seek any and all recourse, and taxing a product of mass consumption such as petrol and diesel is their best option for revenue collection, said Deepak Mahurkar, Partner, PwC.

The government would not want to send a wrong signal with BPCL up for privatisation, Mahurkar said, adding, “going back to administered pricing will send a very wrong signal for the economy from an investment perspective.”

Opposition flays Centre

The Opposition ramped up its criticism of the government for the price rise. “Over the last six years and eight months, the Centre has earned over ₹20-lakh crore by imposing additional excise duty on petrol and diesel,” said Congress spokesperson Pawan Khera. “We demand an immediate withdrawal of this additional ‘Modi Tax’ imposed over the last six years and eight months. This in itself will reduce petrol prices to ₹61.92 and diesel to ₹47.51.”

“These hikes in the excise duties are clearly meant to offset the losses to government revenues due to the tax concessions provided to the corporates and income tax payees,” the CPI(M) Polit Bureau said in a statement.

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