Tax collections have collapsed, have to be recouped
With the government hiking excise duties on both diesel and petrol by R6.5 and R7.75, respectively, per litre since November, questions are being raised as to whether the government and/or the oil companies are being too greedy and retaining most of the fall in crude oil prices. So, while the Indian crude basket price fell from $77.58 per barrel in November 2014 to $45.33 in January 2015, prices of petrol have fallen from R64.24 per litre to R58.91 (in Delhi) and diesel from R53.35 to R48.75—so, while crude prices fell 42%, petrol prices fell just 8.3% and diesel 8.9%. Very broadly, if prices of diesel and petrol fell in line with crude oil, this suggests the oil companies have pocketed a very large part of the benefit. The government has got around R18,000 crore of taxes already, and there is no telling when duties could be raised once again.
Given the large losses incurred by both the government as well as the oil PSUs in the past, retaining a large part of the price cuts is actually a good strategy. For one, it creates a cushion for the period when oil prices start rising again—else oil companies will have to raise petrol and diesel prices as soon as the oil cycle changes. Two, it isn’t that simple as oil marketing companies are actually incurring huge inventory losses—they are charging customers prices based on current global prices while they bought the crude when prices were higher; between November and January, for instance, there has been a 42% fall in crude oil prices and that is an inventory loss the oil marketing PSUs have to bear.
Three, from the point of view of the government, already facing a R1 lakh crore shortfall in gross tax collections, a significant part of the fall will also come from the petroleum sector. In FY14, the petroleum sector contributed R1,06,090 crore while in Q1 FY15, just R22,505 crore was collected—even if you annualise this collections, this means a R16,000 crore shortfall in collections. Since November, however, there has been a significant fall in prices of both diesel and petrol—indeed, if the oil companies had passed on the entire fall to consumers, the fall in excise duty collections from these two fuels would have been even more significant. Given the sharp fluctuations in oil prices, calibrating the change in prices and hiking excise duties is a good strategy, no matter how unpopular it might appear.