For more than one reason, the week that passed by was significant for state-owned oil marketing companies in terms of strengthening their case for a revision in fuel prices, especially that of petrol.

While an increase, in the backdrop of galloping crude oil prices, has been on the cards ever since the results of the five Assembly elections were declared early last month, what remains unclear is when the government will bite the bullet.

The Reserve Bank of India's annual monetary policy (2012-13), unveiled on April 17, came as a shot in the arm for the three companies — IOC, BPCL and HPCL.

“Fuel inflation moderated from over 15 per cent in November-December, 2011, to 10.4 per cent in March, 2012, even as global crude oil prices rose sharply, reflecting the absence of commensurate pass-through to domestic consumers. It is imperative for macroeconomic stability that administered prices of petroleum prices are increased to reflect their true costs of production,” the apex bank said.

The stage could not be better set as IOC, on behalf of the other two companies too, on the same day gave a wake up call to the government.

The companies want the Centre to either provide cash compensation (at the rate of Rs.49 crore daily) to cover the losses on petrol too or reduce the excise duty to the extent of their under-recovery on the product. They also want the Centre to advice the State governments to reduce sales tax. In what sounded like an ultimatum, the representation said: “Or else the company [will] increase the price of petrol by Rs.8.04 per litre (excluding State levies) with immediate effect.”

By insisting on a hike only in petrol prices, the oil companies, according a senior executive of IOC, had also tried to be politically correct as putting pressure to increase diesel, LPG and kerosene prices would complicate the matters for the government.

The dilemma for the Centre is understandable. It has to ensure that the oil companies have the financial strength to import crude and maintain product supplies in the domestic market. Since increasing petrol prices is bound to dent the budget of common man and any such move, when Parliament is in session, will only make things worse for the government, the chances of an excise duty cut looks imminent.

It will then be left to the State governments to respond with a reduction in the value added tax on petrol.

According to a study by the RBI on State finances, in 2011-12, only three States reduced the tax. During the fiscal, petrol prices increased four times.

Goa reduced VAT by two percentage points (providing a relief of 80 paise a litre). The cumulative reduction in sales tax rate was by 3.19 percentage points (between May and December, 2011) in Kerala. Uttarakhand reduced VAT to provide a relief of 78 paise a litre petrol (in September) and 45 paise a litre in November. How much the governments, both at the Centre and at the States, will be willing to forego their revenue remains to be seen.

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