OMCs may go slow on pass-through, oil import bill seen higher in H2 & FY22; no immediate threat to current account
Indian refiners have begun preparatory work and can swiftly enter into contracts once the sanctions are lifted, he said.
The Centre may no longer be able to postpone a cut in auto fuel taxes with the Brent crude surging more than 2% on Monday to approach $71/barrel, following a missile attack on Saudi Aramco’s facilities and improved outlook on the recovery of the global economy. Given its acute fiscal constraints, it has so far been resisting a crescendo of demands for tax relief from consumers and the Opposition parties, and stressing the need for coordinated action with state governments to cushion the impact of tax cuts on its own finances.
Bank of America (BofA) had earlier estimated that a Rs 5/litre cut in taxes on petrol and diesel to ease pressure on consumers could widen the Centre’s FY22 fiscal deficit by 30 basis points from the estimated level to 7.5% of GDP. The Rs 5/litre tax could reduce Centre’s income from assorted specific levies on auto fuels by around Rs 71,760 crore, it said.
A higher price of crude will also have an impact on India’s current account, owing to the rise in import bill. However, there is no reason for worry on this front in the near future given that India produced current account surpluses in three straight quarters through Q2FY21 (the surplus in Q2 moderated to $15.5 billion or 2.4% of the gross domestic product (GDP) in the quarter from $19.2 billion (3.8%) in Q1).
Even the third quarter is unlikely to witness a large deficit in the current account, despite the merchandise trade deficit rising to $34 billion from $14.8 billion in Q2, as other inflows are robust; capital inflows will likely more than suffice to finance any modest deficit, if at all, in the current account. Trade deficit exceeded $27 billion in the first two months of the current quarter, as imports almost returned to normalcy.
Fuel consumption is expected to grow by around 9% annually in FY22, warranting proportionate increase in imports; elevated crude prices through the fiscal would inflate the import bill further, and potentially stress the current account in the year.
On Monday, retail petrol price in Delhi was at an all-time high of Rs 91.17/litre, rising by Rs 4.22/litre since the same day a month ago, as OMCs gradually increased the base price of the products amid rising international crude prices.
The Centre levies a total tax – comprising basic excise, surcharge, agri-infra cess and road/infra cess – of Rs 31.83/litre for diesel and Rs 32.98/litre on petrol. In March and May 2020, surcharge and cess on auto fuels were cumulatively increased by Rs 13/litre on petrol and Rs 16/litre on diesel. As much as 60% of the retail price of petrol – which has crossed the Rs 100-mark in some places in Rajasthan, Madhya Pradesh and Maharashtra, and is at an all-time high elsewhere in the country – is made up of central and state taxes. Taxes make up for about 56% of the record high retail diesel rates.
Economists at SBI in a report stated that retail prices of the two fuels could go down (by around 15-20% from the current levels), if the taxes on these are subsumed in the goods and services tax, due to the mitigation of cascading of taxes. Even though finance minister Nirmala Sitharaman said recently that a decision in bringing the two auto fuels under the GST would be taken closer to the GST Council meeting, the proposal could face resistance from states, which fear further erosion of their autonomous taxation powers due to the move. In fact, since the bulk of the Centre’s taxes on the fuels are not shared with states (on the contrary, GST receipts are shareabale), it would also have to assess the revenue implications of the move.
The price of Indian basket of crude was $62.16/barrel on March 3, up from $50/barrel in mid-December, supported by global demand recovery and voluntary production cuts from major oil exporting nations.
Owing to lower demand, Indian basket of crude prices were in the range of $19-$44/barrel in the first half of FY21, when crude import bill fell 57% annually to $22.5 billion. The import bill in the second half of the fiscal will likely be significantly higher.
“Given the rising burden on public, the PSU oil marketing companies may go slow on automatic pass-through of rise in international fuel prices to the consumers,” Prashant Vasisht, vice-president at Icra, said, adding that “marketing margins may witness pressure in the near term, if they (OMCs) pause fuel price changes as per the pricing formula”. The marketing margin of `1.56/litre in the ongoing quarter till date is the lowest encountered by OMCs in the last nine quarters.
ONGC may gain from rising crude prices as the price it sells crude at is linked to international rates. According to analysts at Motilal Oswal Financial Services, a rise of $5 barrel in Brent prices would raise ONGC’s earnings per share by 14% in FY22.
Having dropped below the 6% mark in early October 2020, the benchmark 10-year government bond yields started hardening in the past two months to breach the 6% level again on January 27 due to elevated supplies, especially of the long-tenure papers. It stood at 6.22 on Monday, against 6.23 on Friday. The Centre’s decision to keep gross market borrowing at an elevated level of Rs 12 lakh crore in FY22, on top of an estimated record gross borrowing of Rs 12.8 lakh crore for this fiscal, prompted market participants to expect supply to outstrip demand. A recent rise in yields on US government securities and global crude oil prices just complicated the situation.
Meanwhile, the rupee has almost held steady at just over 73 against the dollar in recent months, thanks to strong inflows and deft management by the central bank. Analysts expect that the record foreign exchange reserves will help India steer through any crisis. The central bank has added $127 billion to its forex kitty since the beginning of January 2020, the biggest rise among major Asian economies, to almost $585 billion.
In April-January FY21, the country imported crude oil worth $47.2 billion (`3.49 lakh crore) against the $87.9 billion (Rs 6.18 lakh crore) spent on crude imports in the same period in FY20. In terms of import volumes, as much as 162.8 million tonne (MT) of crude oil was imported in April-January, 13.8% lower than the same period in FY20. “Taking advantage of low crude oil prices in April/May 2020, the strategic petroleum reserves have been filled to full capacity (5.3 MT), leading to notional savings of approximately Rs 5,000 crore,” Union petroleum minister Dharmendra Pradhan said in Parliament recently.