Rs 2.5 Fuel Price Cut Could Cost Centre $1.42 Billion Till End Of March

The government lowered retail fuel prices, offering relief to consumers hurt by surging crude oil prices and adding pressure on one of Asia's widest budget deficits.

The central government will cut excise duty on petrol and diesel by Rs 1.5 a liter, Finance Minister Arun Jaitley said in Delhi on Thursday, a day before the inflation-targeting Reserve Bank of India decides on monetary policy. State-run oil marketing companies will offer relief of 1 rupee a liter on the sale of these fuels. State governments have been asked to match the combined cuts, he said.

The government had so far resisted cutting prices as it kept a close watch on its fiscal deficit target, a move that helped Prime Minister Narendra Modi win a credit-rating upgrade from Moody's Investors Service last year. The goal is to narrow the budget deficit to 3.3 percent of gross domestic product in the fiscal year ending March 2019 from 3.5 percent in the previous year.

Thursday's measures would cost the central government Rs 10,500 crore ($1.42 billion) in the six months through March and widen the budget gap by 0.05 percent of gross domestic product, Mr Jaitley said.

For state-run fuel retailers, Indian Oil Corp., Bharat Petroleum Corp. and Hindustan Petroleum Corp., it would reduce pretax profit by a combined Rs 4,500 in the year ending March 31, according to people with knowledge of the matter. On an annualized basis, profit before tax may drop by about Rs 9,000 crore based on current sales volumes, they said, asking not to be identified as they aren't authorized to speak to the media.

India joins counterparts in Indonesia, Brazil and elsewhere that have offered relief to fuel consumers as global oil prices rallied, albeit belatedly as attention shifts to elections next year. The Reserve Bank of India has cited strengthening oil prices as a key risk to its inflation outlook, although gains in consumer prices are for now within the 4 percent midpoint of its target band.

The price of Brent crude, benchmark for half the world's oil, has jumped about 20 percent since mid-August due to concerns of supply shrinking, after U.S. imposed sanctions on Iran come into effect in November. Prices are hovering close to $87 a barrel, the highest in four years.

That's fueled retail fuel prices to a record in India, the world's fastest growing oil user. On Thursday, gasoline prices in Mumbai was Rs 91.43 a liter while diesel was selling at Rs 80.20 before the price cuts were announced.

The move to provide relief is "good economics," Mr Jaitley said, adding that he wanted consumers to spend more on other things apart from energy. He said he was confident of meeting the 3.3 percent budget-deficit target for the fiscal year ending March, pointing to robust direct tax collections.

But not all are convinced about the benefits of the steps announced by Mr Jaitley.

"If crude moves higher and rupee continues to depreciate, what are the next steps," Mayuresh Joshi, the Mumbai-based head of institutional sales at Angel Securities, told BloombergQuint, adding that it's unclear what happens to oil refiners who have to share the burden of subsidies. "This is something that these stocks have taken on their chin."

The S&P BSE Energy index fell the most since August 2015 led by oil refiners after Mr Jaitley announced the cuts. Each of the three state-run refiners - IOCL, BPCL and HPCL - dropped intraday by at least 20 percent.

"This move to ask fuel retailers to absorb prices is bad in spirit," said Deven Choksey, managing director of K.R. Choksey Shares & Securities Pvt. "Asking your treasury department or states to cut taxes is fair, but you can't be asking the companies."