No industry is likely to gain from last week’s fuel price hike. As such, the entire endeavour proves to be a zero-sum game
LAST WEDNESDAY, after prolonged deliberations, the government finally hiked prices of petrol, diesel and LPG. While the market’s immediate reaction appeared confused, it now seems the price hikes mattered little to the market, which was anyway on a downslide. Though the impact of price hikes — Rs 5 per litre on petrol and Rs 3 per litre on diesel — on various industries is easy to gauge, as transportation costs will go up, it’ll be interesting to study how the duty cuts will play out. Besides the price hike, the government cut excise duty on petrol and diesel by Re 1 per litre and customs duty on crude to nil from 5%. Import duty on petrol and diesel was cut from 7.5% to 2.5%, and on other petroleum products from 10% to 5%.
These changes are a mere quick-fix as far as the problems of oil marketing companies (OMCs) are concerned. They will not suddenly turn the OMCs profitable, but will only improve liquidity and ensure their sustenance for a longer time. As in the past, OMCs will continue to depend on the timely arrival of oil bonds to report profits. In fact, if state governments do not reduce state-level taxes, a chunk of this price hike will just flow out to them. For example, if VAT in a state is 30%, out of the Rs 5 price hike in petrol, Rs 1.5 will go to state coffers, leaving Rs 3.5 for OMCs.
It was feared the cut in customs duty may hit gross refining margins of standalone refiners. In fact, there will be some erosion of margins on most petro-products. But import duty on kerosene, LPG and naphtha has already been reduced to zero. For these products, standalone refiners were suffering from negative duty protection — they were paying customs duty on import of crude oil, but could not recover the same on these products. But now, this anomaly has been rectified, which will expand the margins on these three products, compensating for the loss on petrol and diesel. Crude oil producers like ONGC and Cairn will suffer slightly due to the removal of import duty on oil. The subsidy burden for ONGC has been set 73% higher, at Rs 38,000 crore, next year. But the company will still derive some benefit from high crude prices. ONGC’s realisations, which stood at $55 per barrel during FY08, may jump 23% to around $68, if current crude prices hold throughout the year.
The aviation industry has gained, with the customs duty on aviation fuel being halved to 5%. This will lead to savings of over Rs 3,000 per kilolitre of fuel consumed by local players. Cut in customs duty on fuel to 5% will benefit a wider range of industries. Experts believe this will compensate for the rise in costs due to petrol and diesel price hikes. These changes are a zerosum game as far as profitability of domestic industries is concerned. But the impact on the government’s exchequer will be quite huge. How the economy reacts to this
LAST WEDNESDAY, after prolonged deliberations, the government finally hiked prices of petrol, diesel and LPG. While the market’s immediate reaction appeared confused, it now seems the price hikes mattered little to the market, which was anyway on a downslide. Though the impact of price hikes — Rs 5 per litre on petrol and Rs 3 per litre on diesel — on various industries is easy to gauge, as transportation costs will go up, it’ll be interesting to study how the duty cuts will play out. Besides the price hike, the government cut excise duty on petrol and diesel by Re 1 per litre and customs duty on crude to nil from 5%. Import duty on petrol and diesel was cut from 7.5% to 2.5%, and on other petroleum products from 10% to 5%.
These changes are a mere quick-fix as far as the problems of oil marketing companies (OMCs) are concerned. They will not suddenly turn the OMCs profitable, but will only improve liquidity and ensure their sustenance for a longer time. As in the past, OMCs will continue to depend on the timely arrival of oil bonds to report profits. In fact, if state governments do not reduce state-level taxes, a chunk of this price hike will just flow out to them. For example, if VAT in a state is 30%, out of the Rs 5 price hike in petrol, Rs 1.5 will go to state coffers, leaving Rs 3.5 for OMCs.
It was feared the cut in customs duty may hit gross refining margins of standalone refiners. In fact, there will be some erosion of margins on most petro-products. But import duty on kerosene, LPG and naphtha has already been reduced to zero. For these products, standalone refiners were suffering from negative duty protection — they were paying customs duty on import of crude oil, but could not recover the same on these products. But now, this anomaly has been rectified, which will expand the margins on these three products, compensating for the loss on petrol and diesel. Crude oil producers like ONGC and Cairn will suffer slightly due to the removal of import duty on oil. The subsidy burden for ONGC has been set 73% higher, at Rs 38,000 crore, next year. But the company will still derive some benefit from high crude prices. ONGC’s realisations, which stood at $55 per barrel during FY08, may jump 23% to around $68, if current crude prices hold throughout the year.
The aviation industry has gained, with the customs duty on aviation fuel being halved to 5%. This will lead to savings of over Rs 3,000 per kilolitre of fuel consumed by local players. Cut in customs duty on fuel to 5% will benefit a wider range of industries. Experts believe this will compensate for the rise in costs due to petrol and diesel price hikes. These changes are a zerosum game as far as profitability of domestic industries is concerned. But the impact on the government’s exchequer will be quite huge. How the economy reacts to this
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