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Oil Tax: If Wishes Were Horses – BR Research

Observers wasted no time in pointing out the unrealistic and overambitious nature of the Rs 750 billion targets budgeted for the oil tax in the FY22-23 budget. First of all, this is not the first time that PL’s assumptions have bordered on the ridiculous. Last year was no different. Only this goal from last year was at least mathematically possible. This one isn’t even that.

Unless, of course, budget officials expect demand for oil to grow another 15% in FY22. That’s not terribly bizarre on the face of it. After all, combined oil consumption for FY22 is expected to be around 22 billion liters, up 15% year-over-year. And this happened despite a 20-25% increase in the average price of gasoline and HSD at the pump. So there is definitely an antecedent for oil demand to stay at higher prices.

But there is a limit to that. Don’t expect people to keep filling up the tanks all the time and at any rate. The price increase for FY23 will not be moderate, in order to maintain unabated demand growth. For the sake of simplicity, if the government were to abolish the petrol subsidy today and levy the maximum PL – that would mean retail tariffs at Rs250/ltr – a 90% increase year on year other.

But collecting Rs30/litre immediately is not the plan, according to the finance minister. They want to go gradually and at some point reach Rs30/ltr. And going this route will magically bring in Rs 750 Billion in PL revenue. It can’t. Except through a mini budget, the maximum PL rate is increased to Rs50 or Rs60 or whatever is needed to fill the gap by then.

Things can of course be much easier if commodity prices cool down at some point. The chances of that happening still remain. As thin as they may seem today. If Arab Light refined oil were to fall by 40% next year, the PL at 30 rupees/l would keep prices below current rates. Only that, it does not include the GST, which the Minister of Finance suggested should be imposed by maintaining a balance between the PL and the GST. The TPS target for FY23 is already in serious jeopardy, as PL will be the income of choice, if it comes to taking one of the two.

There is always hope. Refining margins hope after record highs. Hope for a sharp decline in global commodity prices, and soon. And hopes that consumption will continue to grow steadily in an economy facing double-digit inflation and an expected economic slowdown. Good luck.