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The Indian government has announced an increase in excise duty on both petrol and diesel by Rs 2 per liter. This decision comes amidst a significant decline in global oil prices, a factor that seemingly provided the fiscal space for the government to implement this measure without directly impacting the retail prices paid by consumers. The excise duty on petrol has been raised to Rs 13 per liter, while the duty on diesel now stands at Rs 10 per liter. This adjustment, as per the notification released by the Department of Revenue under the Ministry of Finance, is scheduled to take effect on April 8, 2025. A key element of this policy change is the assurance that the increased excise duty will not translate into higher prices at the pump for the average citizen. The Ministry of Petroleum and Natural Gas has directed Public Sector Undertaking (PSU) Oil Marketing Companies (OMCs) to absorb the additional excise duty, ensuring that the retail prices of petrol and diesel remain unchanged. This strategic move aims to bolster government revenue without burdening the public with increased fuel costs, especially given the recent fluctuations in global oil markets and their potential impact on the Indian economy. The government's decision to hike excise duty while simultaneously shielding consumers from price increases reflects a calculated approach to managing the complex interplay between global commodity prices, domestic fiscal policy, and the cost of living for Indian citizens. It allows the government to capitalize on lower crude oil prices to shore up its revenue streams without triggering inflationary pressures or eroding consumer confidence. This strategy also provides a buffer against potential future increases in global oil prices, as the additional excise duty can be adjusted downwards if necessary to mitigate the impact of rising crude costs on retail fuel prices. The timing of this decision is also noteworthy, as it follows the government's earlier move in December 2024 to scrap the windfall profit tax on domestically-produced crude oil and exports of jet fuel (ATF), diesel, and petrol. That decision was prompted by a prior decline in international oil prices, suggesting a dynamic approach to adjusting fiscal policies in response to global market conditions. India had initially imposed windfall profit taxes on July 1, 2022, aligning itself with a growing number of nations seeking to capture a portion of the supernormal profits earned by energy companies during periods of high oil prices. The subsequent removal of these taxes and the current increase in excise duty demonstrate the government's willingness to adapt its fiscal strategies to the evolving economic landscape. This flexibility is crucial for ensuring both revenue stability and economic competitiveness in a volatile global energy market. The implications of this policy shift extend beyond the immediate impact on government revenue and consumer prices. It also has implications for the financial performance of PSU OMCs. While the government has mandated that these companies absorb the increased excise duty, this will undoubtedly put pressure on their profit margins. The extent of this pressure will depend on several factors, including the prevailing global oil prices, the volume of fuel sales, and the operational efficiency of the OMCs. If global oil prices remain low, the OMCs may be able to absorb the additional excise duty without significant financial strain. However, if oil prices rise, the OMCs may face challenges in maintaining their profitability while adhering to the government's directive to keep retail prices unchanged. In the long term, this situation could lead to a reassessment of the pricing mechanisms for petrol and diesel in India. The government may need to consider alternative approaches to balancing the interests of consumers, the financial health of OMCs, and its own revenue needs. This could involve exploring options such as a more flexible pricing mechanism that allows for gradual adjustments in retail prices in response to changes in global oil prices, or providing direct subsidies to consumers to offset the impact of higher fuel costs. Ultimately, the success of this policy shift will depend on the government's ability to navigate the complex challenges of managing a dynamic energy market while ensuring the affordability and accessibility of essential fuels for its citizens. The interplay between global oil prices, domestic fiscal policies, and the financial performance of OMCs will continue to be a critical factor in shaping the future of India's energy sector.
Harshraj Aggarwal, Executive Vice President at Yes Securities, provided insights into the rationale behind the government's decision. Aggarwal noted that the excise duty hike was anticipated, given the correction in crude oil prices. He further emphasized that the marketing margins, which had previously exceeded Rs 10 per liter, gave the government confidence in implementing this policy change. Aggarwal's analysis suggests that the government viewed the prevailing market conditions as favorable for increasing excise duty without triggering adverse consequences for consumers or the economy. The relatively high marketing margins provided a cushion that could absorb the additional tax burden, allowing the government to capture a portion of the benefits arising from lower crude oil prices. Aggarwal also addressed the potential impact of this policy shift on the LPG sector. He stated that the LPG burden would likely decrease at current crude price levels. This suggests that the government's decision to hike excise duty on petrol and diesel is part of a broader strategy to manage the overall energy sector and its impact on the economy. By adjusting excise duties and allowing market forces to influence LPG prices, the government aims to optimize revenue streams while ensuring the affordability of essential fuels. However, Aggarwal also cautioned that the current crude price levels could lead to inventory losses for OMCs in both refining and marketing operations. He acknowledged that the OMCs may face financial challenges if crude prices remain low, as they would be forced to sell their existing inventory at lower prices than they were acquired. Despite these potential challenges, Aggarwal expressed optimism about the future prospects of the energy sector. He stated that Yes Securities continues to build in a Rs 3 per liter marketing margin in its estimates, suggesting that the firm expects the OMCs to maintain profitability even with the increased excise duty and potential inventory losses. Aggarwal also mentioned the possibility of positive changes in tariff revisions, which could further improve the financial performance of the OMCs. However, he cautioned that crude prices could pull back from current levels and reduce marketing margins further, highlighting the inherent uncertainty in the global energy market. Aggarwal's analysis underscores the complex and dynamic nature of the energy sector. The government's decision to hike excise duty on petrol and diesel is not an isolated event, but rather part of a broader strategy to manage the interplay between global oil prices, domestic fiscal policies, and the financial performance of energy companies. The success of this strategy will depend on the government's ability to adapt to changing market conditions and to strike a balance between the interests of consumers, the financial health of OMCs, and its own revenue needs.
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Source: Govt increases excise duty by Rs 2 each on petrol, diesel