Outcome of EGOM meeting

The Empowered Group of Ministers (EGoM) has decided to increase the auto and cooking fuel prices and reduce the custom and excise duty on crude oil and other petroleum products.

• EGOM has decided to hike Rs.3/ltr on diesel, Rs.2/ltr on kerosene and Rs.50/cyl on LPG. However it has considered steep cut in custom duty by 5% in crude oil (from 5% to nil) and in all petroleum products (from 7.5% to 2.5%)
• The total under recovery for FY12E previously was at Rs.1700bn considering the steps taken by the EGOM, the total under recovery will reduce by Rs.490bn to Rs.1200bn in FY12E.
• Reduction in custom and excise duty will lead to revenue loss of ~Rs.490bn to the government.

Comparison of fuel price with other neighbouring countries:

Based on the below mention table the prices of PDS Kerosene in India is the cheapest in the region and is 66% lower than the price in Pakistan, 65% lower than Nepal, 47% lower than Bangladesh and 41% lower than Sri Lanka. The prices of domestic LPG in India is also the cheapest in the region and is 55% lower than
the Sri Lanka, 52% lower than Nepal, 35% lower than Pakistan and 18% lower than Bangladesh.

                        Diesel / Rs. Ltr        Kerosene / Rs. Ltr           LPG / Rs. cyl
India                      37.75                       12.73                             345
Pakistan                 48.89                       43.95                              614
Bangladesh            27.81                       27.81                              484
Sri Lanka               34.53                       25.12                              878
Nepal                    42.61                       42.61                              821
Source:MoPNG

What is the Implication on Government and Companies?
A) Implication on Government
Reduction in Custom and Excise duty will lead to revenue loss of ~Rs.490bn to the government.

Breakup of Revenue loss to the government In billion
Reduction in custom duty                                                                                   Rs.260
Reduction in Excise duty                                                                                    Rs.230
Total Loss                                                                                                       Rs.490


Break up of Revenue loss due to Import Duty cut from 5% to 0% on crude oil
Particulars                                                                                                             Amount
Crude Imported in India (MMT)                                                                                     140
Current Indian Crude oil Basket ($/bbl)                                                                        112.7
Import Duty @ 5% ($/bbl)                                                                                             5.6
Import Duty for the Government (Rs. in bn)                                                                  260.2
Loss for the Govt due to duty cut from 5 % to 0% (Rs.in bn)                                    260.2
Note: Indian basket ($/bbl) as per first fortnight June 1-15


Excise Duty cut on diesel by Rs.2.6/Ltr (from Rs.4.6 to Rs.2/Ltr)
Consumption of Diesel (MMT)                                                                                                       65
Cut in Excise Duty (Rs./Ltr)                                                                                                          2.6
Revenue Loss for the Government (Rs. In bn)                                                                               236.9 
Total Loss for the Government (Rs. In bn)                                                                               496.9


B) Implication on companies
Total under recovery will reduced by 26% to Rs.1200bn for FY12E
The increase in fuel prices and duty cut will help oil marketing companies to cut under recoveries by 29.4% from Rs.1700 bn to Rs.1200bn in FY12E. This is at an assumed Indian crude oil basket at $112/bbl on June, 1-15, 2011 fortnight. However, the subsidy sharing mechanism is not yet decided for remaining under recovery by the EGOM.

Due to lack of clarity we have assumed subsidy sharing mechanism based on Q1 FY12E sharing formula as 52.5% of Government, 33.3% for upstream companies and balance would be provide by OMC’s. After the EGOM meet government indicated that they will see the situation at the end of the year and decide the subsidy sharing formula later part of the year.