Crude price spike: Will Centre cut auto fuel taxes?

Geopolitical tensions in Eastern Europe have pushed the price of the Indian basket of crude to over $100 a barrel for the first time since September 2014. Brent crude crude was trading at $116.34/barrel at 6:45 pm on Thursday. This could adversely impact India through higher inflation, and weaker current account and fiscal balances.

Elevated prices of natural gas and other commodities would also produce a fiscal cost for India, mainly in the form of an increased fertiliser subsidy bill and lower corporate margins that could hit tax revenues.

State-run oil marketing companies (OMCs) have not revised the retail prices of petrol and diesel since November last year when crude prices (Indian basket) were at $80 a barrel, apparently because of the ongoing polls to five state assemblies. Petrol price in Delhi now would have been Rs 139/litre or thereabouts, up nearly Rs 44/litre from the mid-November level, if the retail auto fuel prices had moved in tandem with crude (assuming OMCs resorted to full pass-through of costs before they put on hold retail rate changes).

The Centre has the option to forego some part of the tax revenues from auto fuels to subsidise consumers against the rise in crude prices. It will have to gauge the net impact of costlier crude on key economic parameters including growth and on the larger political economy before taking a final call.