PM Modi Has An Oil Problem. It Is Set To Worsen With Saudi Targeting $80

Prime Minister Narendra Modi has an oil problem. And it’s set to worsen with Saudi Arabia rooting for the commodity to push through the $80 (Rs. 5,468) barrier.

PM Modi’s government made the most of cheap oil by substituting any fall in prices with taxes that kept retail fuel rates unchanged for consumers and boosted the federal revenue. Now, pressure is mounting to forego some of that windfall as pump prices of gasoline and diesel hit records, likely marring the ruling party’s prospects at the national ballot in 2019.

“There is a strong case for the central government to take another excise duty cut, and ask state governments to reduce value added tax,” Anil Sharma and Ravi Adukia, analysts at Nomura Financial Advisory and Securities India Pvt. wrote in a note Tuesday.

Fuel prices have started to pinch as Brent, the benchmark for more than half of the world’s oil, hit $80 a barrel last week. It’s still short of its all-time high of $147.50. But cutting local taxes, which account for more than half of the retail gasoline and diesel prices, would stretch government finances at a time when the subsidy burden on kerosene and cooking gas is climbing.

Assuming an average oil price of $70, the fiscal 2019 subsidy would total about 355 billion rupees, or 105 billion rupees higher than budgeted, according to Kotak Institutional Equities. While Saudi Arabia has avoided pinpointing an exact price target for oil, Bloomberg reported citing people familiar with development that it is aiming for $80 to support the valuation of Saudi Aramco before an initial public offering.

Still, the political implications of cushioning the blow for motorists may be more compelling. State refiners that control more than 90 percent of the retail market, didn’t raise gasoline and diesel prices for nearly three weeks ahead of the elections in Karnataka. Elections for at least four more states are scheduled later this year.

Holding prices even for days weighs on the finances of the state refiners Indian Oil Corp., Bharat Petroleum Corp. and Hindustan Petroleum Corp. They end up absorbing the losses since fuel prices have technically been deregulated and the government does not provide any subsidy. Not surprisingly, their shares have been among the worst performers on the NSE Nifty 50 Index this year.