The common man's budget is likely to face another significant blow as oil marketing companies (OMCs) struggle with massive losses. According to recent analyses by rating agencies ICRA and CRISIL, petrol and diesel prices could see a further increase of up to 5 rupees per liter. This warning comes as state-run oil firms grapple with heavy 'under-recovery'—a situation where the cost of production and procurement exceeds the retail selling price—triggered by global crude market shocks and the ongoing crisis in West Asia.
The Scale of Under-Recovery and Daily Losses
Following an approximate 8 percent rise in fuel prices during the second half of May, consumers might have to brace for another hike. Reports suggest that fuel prices could climb by an additional 5 rupees per liter. The primary driver behind this potential surge is the daily loss of approximately 610 crore rupees being incurred by public sector OMCs. These losses are attributed to high international crude oil prices and supply chain disruptions caused by geopolitical tensions in West Asia.
Prashant Vashistha, Senior Vice President and Co-Group Head of Corporate Ratings at ICRA Limited, provided detailed insights into the current pricing structure. 5 rupees per liter in the retail prices of petrol and diesel since May 15, OMCs are still losing money. 5 rupees per liter on diesel. Vashistha emphasized that the three major state-owned fuel companies combined are losing nearly 610 crore rupees every single day. An additional hike of 5 rupees per liter could help these companies reach a 'break-even' point, where their earnings finally align with their costs.
Impact Beyond Auto Fuels: LPG and ATF
The financial strain isn't limited to petrol and diesel alone. ICRA estimates that the under-recovery on LPG remains high at approximately 680 rupees per cylinder. On top of that, the loss on Aviation Turbine Fuel (ATF) is estimated to be around 93 crore rupees per day. CRISIL Ratings' analysis suggests a grimmer outlook; if crude oil prices remain elevated and OMCs continue to mitigate their losses, the total increase in petrol and diesel prices could eventually approach 10 rupees per liter.
Macroeconomic Consequences and Inflationary Pressure
CRISIL has warned of a broad impact on the entire economy, while rising fuel prices directly increase transportation costs, which in turn fuels both food and core inflation. 5 rupee per liter hike in fuel prices could lead to an increase of about 36 basis points in consumer inflation. If the total hike reaches 10 rupees per liter, the impact could escalate to 48 basis points. Transportation costs are identified as the primary catalyst for this inflationary trend.
The logistics sector in India is highly sensitive to fuel price fluctuations. CRISIL pointed out that freight transport accounts for 54 percent of India's total logistics costs. Notably, road transport handles about 71 percent of the total freight movement in the country. Within road transport costs, fuel alone accounts for a staggering 42 percent. Consequently, any spike in fuel prices has a severe cascading effect on the supply chain. Sectors heavily dependent on transport will face higher operational costs. Specifically, retail prices for essential commodities like dairy products, fruits, pulses, spices, tea, coffee, eggs, meat, and fish are expected to rise as transportation expenses are passed on to consumers.
Crude Oil Price Trends and Future Outlook
Manufacturers are currently facing a double whammy of rising input costs linked to crude oil and increased transportation expenses. This dual pressure is squeezing profit margins and pushing up consumer prices, while during the first two months of the current financial year, crude oil prices have averaged 112 dollars per barrel. This is Notably higher than CRISIL's full-year estimate of 95 dollars per barrel. Despite the recent price adjustments, fuel retailers continue to operate at a loss. As a result, the debate over balancing OMC finances, controlling inflation, and protecting consumer purchasing power is expected to intensify in the coming weeks.