Petrol Price Hike

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Impact of Petrol Price Hike
Economics
State-run oil companies announced a hike of Rs 7.50 per litre in petrol prices - a direct fall-out of elevated international crude oil prices, which had until now not registered a pass-through in domestic market prices; thereby impacting the financial and liquidity position of oil marketing companies (OMCs) in the country. A depreciating rupee has only added to this pressure. While diesel and LPG prices have been left untouched, this move is expected to provide some support in reducing under-recoveries of OMCs through higher revenue inflows.

May 25, 2012

Decontrolled Petro-Price Regime: history Based on the recommendations of the Kirit Parikh Expert Group, the price of petrol was made marketdetermined with effect from June 26, 2010, in a bid to introduce a viable and sustainable system of petroproducts pricing. OMCs consequently base pricing decisions on international oil prices and market conditions. The Government simultaneously announced a series of duty and price changes in this sector in June 2011 to reduce the burden of rising oil prices on both OMCs and retail consumers. These included –     Elimination of 5% customs duty on crude oil Reduction in customs duty on petroleum products by 5% Reduction in excise duty on diesel by Rs 2.60 per litre Increase in price of diesel by Rs 3 per litre, of PDS kerosene by Rs 2 per litre and of LPG by Rs 50 per 14.2 kg cylinder

The estimated annual revenue loss for the Government from this move was pegged at Rs 49,000 crore, with OMCs expected to incur under-recovery losses to the tune of Rs 121,571 crore (as against an estimate of Rs 171,140 core prior to these changes). Actual under-recoveries for the year stood at Rs 138,541 crore in 2011-12. Financials of OMCs: descent Despite deregulation of petro-product prices and reduction in duties, the financial position of OMCs has only deteriorated further, with combined losses increasing by Rs 35,610 crore in FY11 over FY10. Increased compensation from the government has provided some external buffer support to the financial position of OMCs (as shown in Table 1 below).

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Economics
Table 1: Profit/Loss of OMCs (Rs crore) Head 2009-10 2010-11 Combined PAT of OMCs 13,060 10,531 Provision for taxation 5,537 3,323 PBT 18,597 13,854 Less compensation received: Budgetary support 26,000 41,000 Upstream compensation 14,430 30,297 Combined loss of OMCs 21,833 57,443 Source: Ministry of Petroleum and Natural Gas

Furthermore, the Ministry has noted that rising under-recoveries have worsened cash-flows of OMCs, compelling them to resort to increased borrowings to meet their working capital and project funding requirements. In a highinterest rate regime on account of monetary tightening, these increased borrowings and interest payouts have simultaneously contributed to magnifying the financial burden of OMCs.

Table 2: Product-wise under-recoveries (Rs crore) Sensitive Petro-Products 2009-10 2010-11 2011-12 Petrol 5,151 2,227 n.a. Diesel 9,279 34,706 81,192 Domestic LPG 14,257 21,772 29,997 PDS Kerosene 17,364 19,484 27,352 Total 46,051 78,190 138,541 Source: Ministry of Petroleum and Natural Gas

Under-recoveries grew by 77% in FY12 over FY11. This high growth may not be reversed in the current fiscal either. The current daily under-recovery on the sale of diesel, PDS kerosene and domestic LPG incurred by OMCs stands at Rs 509 crore (effective May 16, 2012), calculated against an exchange rate of Rs 53.84 to a dollar. This would directly translate to Rs 185,785 crore for the entire year. A further depreciation of the rupee to Rs 57 to a dollar would at this rate imply under-recoveries mounting to greater than Rs 196,000 crore for the entire year. What prompted the move? Such estimates of under-recoveries are evidently a sign of pressure for OMCs. Oil companies have been pushing for approval on price hike since earlier this year in January; however, political developments had...
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