With oil prices on the boil, the government will be under pressure to cut excise duty on petrol and diesel to help soften the impact on consumers, credit rating agency Icra said today.
With oil prices on the boil, the government will be under pressure to cut excise duty on petrol and diesel to help soften the impact on consumers, credit rating agency Icra said today. Brent prices have jumped 40 per cent to around $67 per barrel this month from $48 in November 2016 when the OPEC had decided to cut back on crude oil production. This would lead to gross under-recoveries on sensitive products climbing to Rs 22,000-25,000 crore in the current fiscal from earlier estimate of Rs 16,000-20,000 crore, Icra said in a statement. Every $per barrel increase in Indian basket crude price pushes up under-recoveries — which is the revenue loss arising from selling products below cost, by about Rs 1000 crore and net import bill by $1.2 billion.
“Further increase in under-recoveries in ensuing years could increase pressure on the Government to increase subsidy allocation for the petroleum products,” said K Ravichandran, Senior Vice President and Group Head – Corporate Sector Ratings, Icra. “Moreover, there will be pressure on the Government of India to reduce the excise duty on auto fuels in order to soften the impact on consumers,” he said. Over the past three months, crude oil prices have increased by about 28 per cent from $52.3 per barrel in August-end. The increase is being attributed to geo-political tensions, extension of timeline for production cutback by OPEC and few non-OPEC countries, higher-than-anticipated global demand growth of petroleum products and some supply disruptions.
“Though the recent run up in crude prices if sustained will have a modest impact on macro economy, it could impact other stakeholders,” Icra said. Ravichandran said the spike in crude oil prices would lead to increase in the working capital requirements and short-term debt levels of oil marketing companies, thereby negatively impacting their profitability. “Higher crude oil prices would also test the Government’s resolve to keep prices of auto-fuels at market-determined levels, which would have material implications for private marketers,” he said. Icra said over the medium term, the global refinery capacity additions are expected to exceed the demand growth owing to which refinery margins are expected to weaken, albeit the near term outlook is positive due to disruptions in refining markets.
Besides, higher petroleum product prices following spike in crude oil prices are expected to modestly impact the demand growth of petroleum products. Due to steady rise in retail prices of petroleum products and escalating competition from the private fuel retailers, the oil marketing companies could face pressure on their marketing margins, it said. Apart from brownfield expansion/debottlenecking projects, the new investments in the sector are still in the initial stages, it added.