Why excise duty on petrol, diesel could go up further despite low oil prices

The current low oil prices have once again created ground for the government to further increase excise duty on petrol and diesel to meet additional expenditure needs arising from Covid-19 outbreak without hurting the consumers.

Official sources said that the present global oil market could easily allow the government to increase excise duty on petrol and diesel by ₹3-5 per litre without impacting their pump prices. This could provide government with additional revenue between ₹45,000-75,000 crore during 2020-21 at a time when expenditure is set to rise to revive economic activity in the country impacted by lockdown.

No decision on raising excise duty on petrol and diesel has been taken as of now but the option is available and the current time is opportune to exercise it, sources quoted above said.

Global crude oil prices are hovering between $20-25 a barrel now. In fact, on Monday US oil WTI fell 300 per cent to reach negative -$37 a barrel level for futures contract slated for May delivery.

For India, the relevant Indian basket of crude has also averaged around $25 in April and touched $20 a barrel on April 17 as per Petroleum Planning and Analysis Cell (PPAC). This is $10 a barrel lower than March price of $35 a barrel when government decided to raise excise duty on petrol and diesel (on March 14) by ₹3 each without effecting any increase in their retail prices.

If we compare retail prices of petrol and diesel now with that of March 14 when government raised excise duty by ₹3 per litre, things become clearer. On March 14, when crude prices were around $35 a barrel, even after factoring in the higher cost, petrol prices stood at ₹69.87 a litre and diesel ₹62.58 in Delhi.

On Tuesday, retail price of petrol is almost at the same level at ₹69.59 a litre and diesel at ₹62.29 a litre in Delhi, when Indian basket of crude is hovering below $25 a barrel.

"Even if state-run oil marketing companies retain the retail price of petrol and diesel at current levels, government could easily increase excise duty on two products by upto ₹5 a litre. It seems that lower than likely fall in retail prices of petrol and diesel may have been kept keeping this mind," said an oil sector analyst not willing to be named.

The government has already amended the law to raise excise duty on petrol and diesel by ₹8 per litre each in future to up to ₹18 per litre in case of petrol and up to ₹12 per litre on diesel. This would be useful once it decided to further raise exercise duty on the two petroleum products. The current oil prices are expected to soften for some time.

"Demand destruction due to Covid-19 has created an unprecedented situation in the oil market with April demand itself down by 30 per cent from 2019 levels. Depressed prices will continue in the medium term till the economic recovery situation is clearer," Debasish Mishra, partner at Deloitte India.