With several analysts talking of oil rising to even $100 per barrel, and consumers already feeling the pinch of high pump prices, it is not surprising the government felt the need to reduce retail prices, more so since we are headed into election season.
With several analysts talking of oil rising to even $100 per barrel, and consumers already feeling the pinch of high pump prices, it is not surprising the government felt the need to reduce retail prices, more so since we are headed into election season. So, even though the government will lose Rs 10,500 crore in the rest of the year, the Rs 1.50 per litre excise cut made sense. What was shocking, however, was the Rs 1 per litre that PSU oil marketing companies (OMCs) have been asked to bear. Given the post-tax reduction in their profits will be Rs 4,500 crore till the end of the year—pre-tax revenues/profits will fall by Rs 7,000 crore—it is odd the markets should hammer OMC stocks down by Rs 71,295 crore ever since finance minister, Arun Jaitley, made the statement on Thursday afternoon.
The reason for the excessive fall is probably due to the fact that markets feel that an important lakshman rekha has been crossed. Eight years ago, the UPA decided that, while there would be a subsidy for diesel, LPG and kerosene, petrol prices would be decontrolled. And, thanks to the UPA’s policies of homeopathic increases in the prices of diesel, the NDA was able to free up diesel prices four years ago while retaining LPG and kerosene subsidies. With the government rolling back 4-8 years of petroleum reform, market-men feel OMCs could be asked to bear Rs 2 or Rs 3, or whatever per litre, if crude keeps rising, and as we get more into the election season. The massive self-goal, by the way, has already cost the government Rs 39,400 crore, in terms of the fall in the value of shares it owns in IOC, HPCL and BPCL. Indeed, the ideal policy would have been to cut central excise and get BJP-ruled states to cut their VAT that has been rising with each hike in crude prices since it is ad valorem. In Delhi, for instance, petrol-VAT rose from Rs 14.88 per litre on January 1 to Rs 17.8 on Friday; and from Rs 8.82 to 11.02 for diesel. Had BJP states lowered their VAT, this would also have helped the Centre score political points over Congress-ruled and other states.
The self-goal has other implications as well. In the past, when the government was subsidising petrol and diesel and also forcing OMCs to share the costs, this hit private retailing outlets like those of Reliance and Essar since consumers flocked to OMCs to buy subsidised fuels; over time, the private retailers mothballed their plants. As the government remained committed to petrol, and then diesel decontrol, private firms began to restart operations; with no certainty as to how long OMCs will sell fuel at Rs 1 per litre cheaper—or whether this will rise further—private pumps will once again start losing customers. Giving investors the feeling that the government is willing to roll back hard-fought reforms just because elections are in the offing was a really bad idea.