The Government’s latest move on diesel and petrol seems to aim at two birds with one stone.
One, the hike in diesel price by Rs 5 a litre (excluding VAT) and reduction in excise duty on petrol by Rs 5.30 a litre helps the public sector oil marketing companies moderate their under-recoveries. At the same time, the Government does not suffer loss of revenue due to the excise duty cut on petrol.
This is because this loss will be compensated by the hike in excise duty on diesel. Of the Rs 5 a litre hike in diesel price, Rs 1.50 pertains to an increase in excise duty. With consumption of diesel in the country running far ahead than petrol, the Government would have ring-fenced or even bettered its income.
According to the Petroleum Planning and Analysis Cell (PPAC), the consumption of diesel in the country in fiscal 2012 was 64.742 million tonnes. This was more than 4.3 times the petrol consumption of 14.993 million tonnes. The gap between diesel and petrol consumption is only increasing. During April to July, domestic consumption of diesel at 24.114 million tonnes was 4.6 times the petrol consumption of 5.192 million tonnes.
Thanks in part to substitution effect due to wide price differential, the demand for diesel in the country is growing much faster than that of petrol. According to Crisil Research, the difference between the running cost for a petrol car vis-à-vis a diesel car has gone up by 85 per cent in the last 7-8 years. According to a study commissioned by PPAC, passenger vehicles account for almost 16 per cent of diesel consumption in the country. The growth in overall consumption of diesel increased from 6.8 per cent in 2010-11 to 7.8 per cent in 2011-12 and to 10.9 per cent in the first four months of 2012-13. In contrast, petrol consumption in the country grew 5.6 per cent in 2011-12 and by 3.6 per cent in the April-July 2013 period.
Relief short-lived?
While the latest move to hike diesel prices provides some relief to the oil marketing companies (under-recoveries will be lower by Rs 15,000 crore for the remaining part of 2012-13), the relief may be short-lived. Even after this hike, diesel price in the international market is higher by around Rs 15 a litre.
With the US Federal Reserve launching another round of economic stimulus through QE3, there could be a spike in the price of global commodities, including crude oil. Brent crude oil price rallied almost $2 a barrel yesterday to trade at $118 a barrel. If the price rise continues, the oil marketing companies may soon be back to square one or worse in quick time. What could mitigate the impact though is an appreciation in the rupee vis-à-vis the dollar. Yesterday, the rupee gained around 2 per cent against the dollar, thanks to improved sentiment about the reforms process being restarted.