The present tax differential between the two fuels, petrol and diesel, should be further reduced to around Rs. 10 from the current level of Rs. 33 since the conventional wisdom that Diesel should be priced lower since it is the poor man’s fuel is not applicable anymore, a top analyst said last week.  Commenting in a research note in an analysis of recent vehicle registration data, the Chairman and CEO of JB Securities, Murtaza Jafferjee, says that although the recent changes in fuel taxation is a step in the right direction, what is dumbfounding is that this good tax policy has been totally negated by NOT passing on these taxes to the consumer but being left to the two oil companies to bear.

“Our analysis is a guestimate of Lanka IOC which commands a market share of around 22%, the loss per litre for CPC will be much higher due to its inefficiency so the profits they have made year-to-date will be wiped out by the end of the year,” Jafferjee highlighted in the JB Securities research note.

murtaza jafferjee
murtaza jafferjee

He noted that in the more recent past, although the loss per litre on petrol of around Rs 10-12 has been offset by the profit per litre of diesel of a similar magnitude, however with the recent tax changes, the profit on diesel has been wiped out.

According to JB study, in the period from July 15 to June 16, monthly Petrol volumes have been growing at a rate of 20-25% on a YoY basis but in the last three months of the said period, there has been a slowdown to around 12-15%.  In comparison, diesel sales have been growing at lower pace at around 10% (the February–May 2016 period shows a large growth which may be explained by its use in thermal power generation).

“The massive growth in the vehicle fleet last year and cheaper fuel prices since January 2015 coupled with higher wages especially amongst public sector workers explains this growth,” the analysis highlighted.

Accordingly, the transportation fleet in the country consumes around 130 million litres of petrol and 200 million litres of diesel a month – a ratio of around 38% for petrol and 62% for diesel. In comparison 10 years ago this ratio was around 23% for petrol and 77% for diesel – in this period diesel sales for the transportation sector have grown by around 20% whilst that for petrol have grown by 120%. This can be easily explained by the huge growth in 2-wheelers, 3-wheelers and small cars, the study elaborated.

Meanwhile, Jafferjee pointed out that fuel taxes is a great fiscal policy tool to carry out demand management, by increasing prices from Rs 95 to Rs 112 inline with the tax increases it would have complimented monetary policy.

“This increase would have had ONLY a transitory effect on inflation – it would have mainly come through second order effects of increased good transportation cost but except for basic food items the price increases would be of a lower order since most FMCG producers are enjoying healthy margins due to the non-pass through of previous input cost reductions,” Jafferjee said.

The research further states that the recent tax increases will yield the treasury approximately Rs 3.2 bn in taxes per month. If one uses the current monthly consumption levels Petrol has a monthly tax yield of Rs 7.8 bn and Diesel Rs 6.4bn.

The study, however, notes the actual figure will be lower for some of the distillate sold by CPC is refined from crude oil that has a lower rate of duty.

“The manifesto of the current President promised the implementation of the fuel pricing formula back in January 2015, India implemented a formula 2 years ago and fuel prices have become less of a political issue, why does it have to be a political issue in this country when it is an imported product –  by not correctly pricing fuel we are overconsuming and there is less of an incentive to economise on consumption or find cheaper alternate fuels,” the research note added.