OPINION: Cheap oil will fund quasi-handouts for Indians
India can afford to give consumers a boost. An effective month-long ban on foreign tourist visas goes into force on Friday as the government seeks to limit the spread of the coronavirus. Travel restrictions make sense to prevent a big outbreak in a poor nation with a weak health system, but the move will hurt a sector that contributes around a tenth of GDP in a slowing economy already reeling from financial blowups. New Delhi can soften the blow by allowing consumers to pocket the benefit of low crude prices. Cash handouts have gained popularity among policymakers as they try to prop up demand that has been crushed by measures implemented to slow the spread of the breakout, and by rising fear. Consumers, the logic goes, will spend faster and more efficiently than governments. Hong Kong and Australia have already announced direct cash payouts to residents. Luckily, cash-strapped India, the world’s third largest importer of crude, has an alternative: it can pass the 40% slump in oil prices over the past month along to the market. That would be a far more efficient way to stimulate the economy than, say, cutting incomes taxes in a country where so few pay them. Economic growth slipped to 4.5% in the September quarter, but Citi analysts note that every 10% decline in oil pushes Indian GDP up 15 basis points. Diesel prices were deregulated in 2014 as global energy costs fell; petrol was liberalised even earlier. But Prime Minister Narendra Modi’s government has largely retained those savings for itself by ramping up taxes. Duties now account for about half of retail fuel prices. Officials will once again be tempted to keep the gains given New Delhi’s shortfall of tax revenues. Politicians are resisting so far, however, and prices are starting to fall. Passing on the full benefit will help to stimulate spending and relieve debt. India’s household borrowing is lower in relative terms than in other major emerging markets, but overall retail credit has risen from 12% to 17% of GDP between 2011 and 2019, says Ambit analyst Sumit Shekhar – a worrying trend given tepid investment and job creation. Low oil prices give India a window to ease the risks and fund a quasi-handout.
Petrol, diesel could get cheaper by as much as Rs 8 by next week: Report
You may have to pay as much as Rs 8 per liter less for petrol and diesel from next week, as per media reports. While some reports said that petrol and diesel could get cheaper by as much as Rs 5-6 in the next week itself, Hindustan Times went on to claim fuel prices could drop by as much as Rs 8 if the rupee-dollar exchange rate is factored in. Following the breakdown of OPEC+ talks on production cuts and Saudi Arabia’s decision to pump more oil into the market as a retaliatory step, the global oil market went into a tailspin with crude prices tumbling more than 30 per cent to just about $35 a barrel, before recouping some of the losses. The drop in crude oil prices, however, did not immediately reflect in retail prices in India. As per reports, retail prices of the day are based on the average price of benchmark international fuel of the preceding fortnight. So the drop in prices will likely get reflected in retail prices over the next 7-10 days. However, the benefits may not transfer to consumers if governments decide to raise excise duty, like the Karnataka govt did recently. Currently, excise duty, VAT and dealer commission account for about half of the retail prices of petrol and diesel in India. Fuel prices, which crossed Rs 90 mark in 2019, have been seeing a continuous fall ever since. Meanwhile, fuel prices were further reduced today due to slump in demand after the coronavirus was declared pandemic. The price of petrol was reduced by 15-16 paise and that of diesel by 12-13 paise across all major cities in the country. Petrol now costs Rs 70.14 per litre in Delhi, Rs 75.84 per litre in Mumbai, Rs 72.83 a litre in Kolkata and Rs 72.86 per litre in Chennai after the price cut. Similarly, diesel costs Rs 62.89 a litre in Delhi, Rs 65.84 a litre in Mumbai, Rs 65.22 a litre in Kolkata and 66.35 per litre in Chennai, according to Indian Oil Corporation website.
Low crude rates to boost valuation of govt share in BPCL
The government could hope to get much better valuation for its share in Bharat Petroleum Corporation (BPCL), if the current trend of low global oil prices continues well into 2020 as it will positively impact the marketing margin of the oil marketing company (OMC). As per the market assessment By Reliance Securities, for every $1 a barrel fall in crude price, the OMCs’ marketing margin is expected to improve Rs 0.45 a litre. If we factor in that since mid-January crude prices have fallen by over $25 a barrel, the OMCs gains would be manifold. But in doing direct calculation, the value of rupee also plays a big factor and it has fallen sharply, lately. Net marketing margin on diesel stands at Rs 5.5 a litre (as on March 7), while the average for Q4FY20 till date stands at Rs 3.53 a litre up 71 per cent QoQ (Q3FY20 – Rs 2.06 a litre). The net marketing margin on petrol stands at Rs 1.83 a litre against negative margin during Q3FY20. The brokerage firm said HPCL would be the biggest beneficiary of lower crude prices resulting in higher marketing margin for the refiner. The company’s net marketing margin on petrol and diesel of Rs 1 a litre can raise its net profit by 41 per cent in FY21, while $1 a barrel change in GRM will potentially increase/decrease its net profit by 17 per cent. Public sector oil refiner and retailer BPCL would be the second biggest beneficiary as its net profit would be impacted by 31 per cent in FY21 for every Rs 1 a litre rise in net marketing margin on petrol and diesel. Also, $1 per barrel change in GRM would increase/decrease BPCL’s net profit 16 per cent, Reliance Securities said. OMCs have also started importing more crude from Saudi Arabia after the US sanctions on Iranian exports. In 2019, Saudi Arabia remained the second biggest oil seller to India. It increased 19 per cent of overall crude purchase of India (4.6 million bpd) from 17 per cent in 2018. The OMCs (BPCL+HPCL+IOCL) import crude oil from Saudi Arabia. In January 2019, they purchased 24 per cent of total crude from Saudi Arabia. “The OMCs could be the largest beneficiary of sharp cut in official selling price to Asian countries by Saudi Arabia,” it said.
Hydrogen-CNG buses likely to hit Delhi roads from next month
Starting next month, buses running on Hydrogen-enriched CNG (HCNG) are likely to hit the capital’s roads. A four-tonne per day compact reformer-based HCNG production plant has come up at DTC’s Rajghat-1 bus depot and is likely to start operations from next month. HCNG, which is a cleaner fuel compared to CNG, will be used to run 50 Cluster scheme buses as part of a pilot project for six months. The Supreme Court had last year suggested looking at hydrogen-run vehicles as a solution for NCR’s poor air quality and while the technology will take some time to appear in the capital, HCNG could be a step in that direction. “The plant is ready and is awaiting approval from the Petroleum Explosive Safety Organisation, which comes under the Union ministry of commerce, and approves all gas stations and filling stations,” an official associated with the project said. “The buses that will be run on HCNG would just require some tuning and no major retrofitting,” he added. In July, Indian Oil Corporation Limited — which has developed the technology to create HCNG — and Indraprastha Gas Limited had laid the foundation stone the plant. According to IOCL, the use of compact reforming process is 30% more cost effective as compared to the physical blending of Hydrogen with CNG. It was, in fact, a directive of the apex court in July 2018 that led to IOCL and IGL collaborating to put up this first semi-commercial plant as a pilot project for conducting the study on the use of HCNG fuel in 50 BS-IV compliant CNG-run buses in Delhi. Mixing hydrogen with CNG physically is a difficult proposition and that is why IOCL came up with the compact reforming process, which reforms CNG with no need for mixing. For the pilot project, 50 buses of the Anthony Road Transport Ltd (a cluster scheme concessionaire) will be fed with HCNG and their efficiency and emissions would be recorded for six months run and then submitted to the Supreme Court. Four tonne of HCNG would be produced at the plant every day and the excess fuel generated would be used to run a generator, which would produce electricity.