Given how tax collections are growing well below what finance minister Arun Jaitley had budgeted just 4 months ago, it is not surprising the government has chosen to levy an additional excise duty of R1.5 per litre on both petrol and diesel. On a full-year basis, the hike is expected to deliver the government around R15,000 crore—so, for the rest of the financial year, the government will earn around R4,000 crore. With prices of petrol and diesel falling anyway in line with global prices, the oil PSUs can afford to absorb the hike—so, if prices had to come down by R3 over the next 3 months, say, the oil PSUs will cut prices by just R1.5 per litre. While not passing on the excise duty hikes looks like the government has done a volte-face on the recent decision to decontrol diesel prices, it is actually just smart strategy—why confuse customers by hiking prices one day and then reduce them every week thereafter? Put together with the decision to fix the cooking gas subsidy at R40 per kg—to be equally shared between the government and the oil PSUs—the process of reducing petroleum subsidies is well under way. The important thing, of course, is that when the LPG subsidies are reviewed next April, they are not increased too much—if the subsidy cap is hiked too much, the process of cutting LPG subsidies will take a hit.
The government would do well to advise oil companies to go easy on reducing prices of both diesel and petrol and, in a sense, try and do what happened during the days of the administered price mechanism, namely, to make some profits while global oil prices are falling and use this to cushion prices when global oil prices start rising. Indeed, were oil prices to fall further—they are already at a 4-year low—the government could even think of another hike in customs/excise duty and use this to either balance the budget or to bear a higher portion of petroleum subsidies.