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Energy: Transfer from one pocket to another - Views on News from Equitymaster
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  • Jan 14, 2002

    Energy: Transfer from one pocket to another

    Last week, through an ordinance, the Government amended the Central Excise Tariff Act allowing it to impose excise duty without any upper limit. The immediate fall out of these powers were felt by the petroleum industry by the very same weekend.

    The Government hiked excise duty on petrol and diesel, which was accompanied, surprisingly, with lower retail prices and without adversely impacting the eternally ominous oil pool account (OPA) deficit. Common sense would tell us that a hike in duties ideally should have led to higher retail prices and/or higher OPA deficit. But through a sleight of hands or more appropriately through the complexity in industry operations the Government has been able to pull-off this feat.

    At time of announcing the administered pricing mechanism (APM) dismantling schedule in 1998 the Government deregulated the refining sector, which was done to attract private investments in the industry segment. Subsequently, refineries conducted their operations on import parity prices, which are set by the Oil Co-ordination Committee (OCC). The marketing and pricing of controlled products (petrol, diesel, kerosene and LPG) continue to be regulated with complete deregulation, as per the schedule, expected in April '02.

    (Rs/litre) Retail Price   Ex-storage point prices   Excise Revenues
    Petrol Existing Revised Change Existing Revised Change Existing Revised
    Delhi 28.9 27.5 -4.8% 21.9 14.5 -33.9% 7.0 13.0
    Mumbai 31.9 30.8 -3.5% 24.2 16.2 -32.9% 7.7 14.6
    Chennai 30.7 29.7 -3.0% 23.2 15.7 -32.6% 7.4 14.1
    Kolkata 29.2 28.0 -4.2% 22.1 14.7 -33.4% 7.1 13.3
    Diesel Existing Revised Change Existing Revised Change Existing Revised
    Delhi 17.2 17.1 -0.5% 14.8 14.2 -3.8% 2.4 2.8
    Mumbai 20.8 20.7 -0.4% 17.9 17.3 -3.7% 2.9 3.5
    Chennai 18.7 18.6 -0.3% 16.1 15.5 -3.6% 2.6 3.1
    Kolkata 17.5 17.5 -0.4% 15.1 14.6 -3.7% 2.4 2.9

    At the retail level, subsidies are primarily offered on kerosene and LPG, which is not entirely cross subsidised by petrol. Therefore, during times of high product prices, the OPA runs a deficit. Over the past three months, oil prices have fallen by 30% from above $26/ barrel to $20/ barrel. Consequently, final product prices have also weakened. This has allowed some breathing space to the OPA leading to a lower deficit, as compared to the initially estimated OPA deficit of Rs 120 bn for FY02.

    On the other hand, as per reports, in the first six months of FY02 the Central Government had already hit 54.5% of its fiscal deficit target of Rs 116 bn. With a weak business cycle, revenue collection of the Government is likely to have got hit. Consequently, the centre had to determine new avenues of raising revenues. Taking advantage of weaker prices of energy sources leading to lower OPA deficit (not part of fiscal deficit) the Government is mopping up some of these OPA funds to reduce the fiscal deficit burden and meet its budget estimates (4.7% of GDP).

    The table above indicates the revised estimated refinery prices for petrol and diesel. The move has a compensating effect, which has enabled marginal reduction in retail prices without affecting the beginning year OPA deficit estimates. As per reports, the move is likely to accrue an additional Rs 16 bn to the Government. Had the excise duty not been revised the OPA deficit would have been lower by a similar amount.



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    Aug 24, 2017 02:59 PM