Thursday, 10 December 2015

Petroleum prices in India : Acheche din are here

Indian economy's achche din, are primarily due to the crash in crude oil prices  from its peak of $110 in mid 2015 to current $37.34 now in Dec 2015. However GoI has not passed all the price reduction to consumers but has retained bulk of that savings in form excise tax.

Benefit has been threefold:

1. Lower import bill thus less transfer of money to external economy and simultaneously savings of precious foreign currency.
2. Introduction of market linked prices for diesel (petrol has been done earlier itself) thus saving huge revenue outgo on subsidy.
3. Increased excise duty provides revenue thus helps in plugging GoI fiscal deficity.
4. Increased refinery margins for OMC/refiners due to high petroleum prices.

GoI needs to do is:

1.  Dis-investment in OMC: since this is the best period for refiners and OMC in India and is likely to fetch premium for companies like IOC/BP/HP. which are at high due to favorable circumstances. This is today's market condition is close to 200,000 crores  (or roughly $30 billion) and equal to 1.5% of GDP.  This should act as a catalyst and invite foreign capital/know-how.

2. Align Diesel/petrol prices to international standards, which would mean that diesel should be 5-10% higher than petrol as that additional price is for negative externality due to higher pollution. This would mean that excise needs to be reduced on petrol and increased on diesel.  To keep this revenue neutral for Govt, every Rs 1/ increase in diesel can result in Rs 4/- decrease in Petrol. Given the current prices @ Rs 46 and 60 for diesel and petrol respectively this would mean some where around Rs 50-52 for diesel and Rs 48-50 for petrol.

This would mean that GoI has to show that it has commitment towards market economy.

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