Govt plans strategy to shield consumers from fuel price hike

The government is evaluating a multipronged approach to shield consumers to the extent possible from an imminent spike in petrol and diesel prices by reducing central excise duty, persuading states to cut value-added tax, directing state-run oil firms to absorb some revenue losses, and leveraging India’s trade ties with energy producers such as the United Arab Emirate (UAE) to ensure uninterrupted supply at affordable rates.International oil prices surged to a 14-year high of over $139 a barrel on Monday with Russia’s ongoing invasion of Ukraine. Western sanctions against Russia and the American decision to ban Russian oil imports will further tighten the supply situation and make energy imports costlier for already bleeding Indian state-run refiners. This calls for an equitable sharing of the burden by all stakeholders, including the consumer, three persons with direct knowledge of the matter said requesting anonymity.They said efforts are being made to pass on minimum burden to the consumer, but the timing and the quantum of hikes in petrol and diesel have not yet finalised. On an average taken since November 4, state-run oil marketing companies (OMCs) are losing about ₹7-10 per litre on petrol and diesel, one of them said. India has frozen fuel prices from November– they are effectively deregulated, but the government still calls the shots on pricing — on account of the latest round of state elections which ended on March 7.“In our view, a coordinated action involving excise cuts, VAT reduction and RSP [retail selling Price] hikes are required as OMCs already operate with wafer thin EBITDA (a measure of operating profit) margins,” Sabri Hazarika, senior research analyst at Emkay Global Financial Services said in a report. The OMCs have made inventory gains in the fourth quarter, the report explained, which makes the “impact of the price freeze” absorbable , “but it is necessary to revert to normative margins going ahead…” .A second person added that “on the principle of equitable burden-sharing at the time of crisis, the government may also direct state-run energy producers such as Oil and Natural Gas Corporation (ONGC) and Oil India Ltd to share their windfall by supplying domestically produced crude to public sector refiners at a discount.”That should help, but not much — India imports about 85% crude oil it processes while balance is supplied by domestic sources. The price of India’s crude oil basket was ₹9,729.39 a barrel on Tuesday. It was ₹5,994.04 on early November 5.According to official data, ONGC reported about 597% jump in its net profit at ₹31,446 crore in the first nine months of the current financial year compared to the same period previous year. This surge was due to rising international oil prices. “The realisation will be further up significantly in the fourth quarter due to the rally in international crude prices,” the second person said.International oil prices saw unprecedented rally recently. They rose to their highest since 2008 during the trading session on Monday after the US said it was considering banning Russian oil imports. It saw benchmarks Brent crude surging to $139.13 a barrel and West Texas Intermediate (WTI) $130.50 in the Monday session. The same day, the rupee also breached the 77-mark against the dollar .“OMCs and government are expecting that the spike in oil prices will be temporary as producers should raise output to calm the oil market,” a third person said. Brent crude closed at $127.98 a barrel on Tuesday, down around 3%. “Market nerves calmed as Europe refrained from banning Russian energy exports,” Kotak Securities analysts Madhavi Mehta and Anup Sahu said in a report.The government does not expect any major disruption in oil supply to India due to the conflict . “India has close ties with energy producers in the Gulf region. Besides, UAE that is one of the major suppliers of energy to India, has recently signed a free trade agreement, which will help us,” the third person said.In an interview, UAE minister of state for foreign trade Thani Bin Ahmed Al Zeyoudi said: “The energy markets are going through a period of uncertainty due to various factors around the world, and we understand India’s concerns in terms of security of supply and pricing. The UAE remains committed to meeting India’s energy needs.”