Tuesday’s announcement of an increase in retail prices of petrol, diesel and cooking gas by the oil marketing companies (OMCs) was inevitable as they are estimated to be losing ₹12 a litre due to the recent surge in global crude oil prices. For the OMCs to recover the higher crude oil cost, retail prices need to increase by ₹9-12 a litre, assuming an average price increase of $18-24 a barrel in the Indian basket of crude since November, when global prices were just above $80 a barrel. The current hike of 80 paise per litre in the pump prices of petrol and diesel, ₹50 a cylinder in cooking gas and a whopping ₹25 per litre of bulk diesel, will not significantly help shore up OMC finances but it spares the ordinary consumers a major shock, for now.
OMCs will continue to struggle because the present attempt to cross-subsidise the retail consumer at the expense of the bulk user is not a great idea. Early reports suggest that diversion has already begun. Therefore, an increase in retail prices of about ten times this order will perhaps be needed to keep OMC finances intact. This can be done painlessly through incremental hikes. However, in doing so, the impact on inflation and growth could be serious, if the tax components in the retail price remain the same. The best way out is for the government to pass on the price entirely on the pre-tax price of retail petrol and diesel, protecting the OMCs, but reduce the excise duty and cess so that the consumer is protected. In that event, an increase of ₹9-12 a litre or even more can be carried out without creating a furore. The need to protect consumers from further fuel inflation becomes important at a time when imported inflation through other commodities is likely to be serious, with the current account too coming under some pressure.
The Centre reduced its excise duty on petrol and diesel by ₹5 a litre and ₹10 a litre, respectively, in November last year to provide some relief to the consumer. According to SBI Research, if the reduced excise duties continue through FY23, the revenue loss to the Centre could amount to ₹1-lakh crore, assuming an 8-10 per cent growth in fuel consumption. It should be willing to take an additional hit of about half this sum, using the cushion it has created in the Budget by underestimating revenue growth. That would significantly reduce the pass through of higher prices to the market. Besides, it could consider setting a trend by reducing reliance on fuels as an easy source of revenue (now over 20 per cent of the Centre’s indirect tax collections) and persuading States to do the same. The revenue loss should be weighed against the damage that inflation can cause. As for making market-linked fuel pricing more acceptable, the Centre should push oil companies to quickly cut pump rates when global prices fall. That has been its old failing.