• Hardening crude will test diesel deregulation: K Ravichandran, Senior Vice President, ICRA

    The expected hardening of crude oil prices following the latest OPEC decision to cut output may not adversely impact the government’s pre-budget calculations but a rise in oil prices over the coming months, if sustained, could test the deregulation of diesel, K Ravichandran, Senior Vice President at ratings agency ICRA tells Bilal Abdi in an exclusive interview. Edited excerpts..

    Now that prices of crude have started going up, should the consumers brace themselves for Rs 5-6 per liter hike in petrol as being speculated?
    A Rs 5-6 hike in petrol would be a requirement from next month. As of now, the oil companies would not be comfortable passing on the burden especially when the overall consumer sentiment is very low due to the demonetisation issue. They would do it in stages. It will definitely be an added burden on the consumers’ pockets.

    Do you think a Rs 5-6 per liter hike in petrol prices would be the stage at which the government would intervene and announce excise duty relief?
    The government may be reluctant to cut excise duty as long as the crude oil prices are below $60 per barrel, as they also have to account for the subsidy outgo provided to consumers as well as take care of the under-recovery burden.

    The centre had budgeted for a petroleum subsidy burden of around Rs 27,000 crore for the current financial year. With the fiscal drawing to a close, what is the expected outgo?
    The actual subsidy outgo in the first six months of the present fiscal year was only Rs 8,000 crore. Hence, the government is in a very comfortable situation for the current fiscal in spite of the recent hardening of crude oil prices. As for 2017-18, the government’s finances will be impacted only if crude prices increase by $20 from the current level and the rupee also correspondingly depreciates to around 70. In that situation, it will be interesting to see whether the government will stick to its de-regulation policy on diesel as diesel has become an important fuel be it in agriculture or the industrial sector.

    How much are the total Gross Under-Recoveries (GURs) suffered by the Oil Marketing Companies (OMCs) in the first half current fiscal? What are the chances the subsidy burden would be passed on to upstream firms?
    The overall under-recovery outgo was approximately Rs 8,000 crore which was entirely borne by the government. As per the current policy, upstream companies are asked to bear the burden when Kerosene under-recoveries go beyond Rs 12 per litre and for LPG, the cap is around Rs 255 per cylinder. Currently, the under-recovery for Kerosene is around Rs 11-12 per liter which is close to breaching the ceiling fixed and the ceiling will be breached if the crude prices harden at $60 per barrel. In case of LPG, the under-recovery level is around Rs 110 per cylinder. So, the upstream companies have a lot of buffer before they are asked to share the burden.

    At what level would the centre’s petroleum subsidy burden stand if prices were to cross anticipated level in near future?
    If crude prices are below $60, and the rupee hovers between Rs 68-70, the government’s outgo should be between Rs 25,000-Rs 35,000 crore in 2017-18 and for 2016-17, it would be around Rs 21,000 crore. A major reason why the government’s subsidy maths would not be affected is the increase in prices and reduction in subsidy volumes. In LPG, key policy initiatives from the government like Direct Benefit Transfer of LPG (DBTL) helped weed out a lot of bogus connections and the “Give it up” campaign helped reduce subsidy volumes. The demand for Kerosene has become almost flat mainly due to electrification, LPG penetration and increase in prices. While the government’s balance sheets are expected to be stable in the next fiscal year, the end consumer may have to face the brunt of hike in fuel prices. Dylan Strome Womens Jersey

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