Prepare for a sharp drop in fuel prices as the locking brakes gradually decrease

NEW DELHI: Prepare for a sharp cut in fuel as part of a broader government plan to put money in people's pockets, reduce inflation, freight, and input costs for farmers as the country eases restrictions with the objective of gradually restarting economic activity. .

Sources familiar with the government discussion said the price cut could be as high as Rs 5-10 per liter when it occurs within a few days, but did not specify whether diesel will experience the biggest reduction. Others said the reduction will be balanced, or substantial but less than the quoted amount.

The general view is that the time has come for retailers to pass on the benefit of low oil and product prices. The argument is that a sharp price cut will increase consumer sentiment and industrial activity wherever they are allowed to resume. In addition, a cheaper charge will help keep consumer prices calm and lower the cost of farmers' inputs when agricultural activities are expected to improve.

Technically, state oil companies are free to decide the prices of the pumps. Although that has generally been the norm, the government informally indicates the direction they should take in unusual circumstances arising from high oil prices, when they are asked to maintain pump prices, or today when they have been pushed to transfer the profit.

The broad contours of the plan indicate that the oil companies will spend their margins from falling benchmark rates, recently set at Rs 13 per liter. Retailers had last revised prices by lowering prices a couple of times on March 15, a day after the government raised excise duties by 3 rupees per liter with the goal of tapping Rs 39 billion rupees a year from fuel sales when prices started to drop. Since that price revision, the average cost of crude purchased by state refineries has dropped 32% during this period from $ 30.59 per barrel on March 16, one day after the price revision, to $ 20.66 today. , but the pump prices have not changed.

Several states have exploited the situation by increasing VAT to Rs 5 per liter in order to make up for the revenue deficit once sales recover as the closing restrictions are eased. Sales have fallen as much as 60% as the blockade restricted vehicle movement and closed businesses.

The executives said that the prices of the pumps are compared with the international prices of the products and not of the crude. “The crude and product markets are witnessing an unprecedented situation. Crude and products have different dynamics. But this time around, even the gasoline (gasoline) and HSD (diesel) benchmarks move differently, though both are lower than crude. Pump prices cannot be adjusted according to these unrealistic prices, a senior executive told TOI, adding that the cut (in price) should be balanced whenever it occurs.

The reserves on the handover of profits are understandable as refiners are looking at an inventory loss of Rs 25 billion in an upside-down oil market.