There are no free lunches, whether in politics or in finance.
Most of the country had breathed a sigh of relief as the Indian government had announced a Rs. 2.50 cut in fuel prices on Thursday. Fuel prices have been on the boil in recent weeks, and the cut was supposed to bring in some much-needed help to India’s beleaguered commuters. But while the move has made the petrol that’s available at pumps marginally cheaper, it’s also had another — and perhaps more serious — consequence.
Shares of India’s oil marketing companies plummeted immediately following the announcement. The Rs. 2.50 cut was to be financed in two ways. One was through a Rs. 1.50 cut in excise duty, which would be borne by the government. But the remaining Rs. 1 was to be borne by government-owned oil companies. As the news hit the markets on Thursday, shares of these companies plunged dramatically, and continued to decline into Friday. Indian Oil Corporation, whose shares were trading at Rs. 151 before the announcement, now trades at Rs. 117; BPCL’s shares has fallen from Rs. 355 to Rs. 266, and HPCL, which traded at Rs. 247, now trades at 164. These are all large companies, and the combined loss in their market caps as a result of their fall was a staggering Rs. 63,300 crore.
IOC, BPCL, and HPCL are all oil marketing companies, and sell petrol and diesel to consumers through their networks of petrol pumps. With them now required to pay an extra rupee from their own coffers for every litre of oil they sell, they were expected to collectively incur a loss of Rs. 4,500 crore. This didn’t please the investors in these companies, and they pulled their money from these stocks. With the stocks down nearly a third in value, Rs. 64,000 crore of investor wealth was wiped out in a matter of days.
Stock market investors aren’t particularly pleased with their unexpected losses, and the government’s decision to push oil marketing companies to absorb an extra one rupee of fuel price increases. Oil prices have been rising across the world — Brent crude prices have risen 17% in the last few weeks, and recently touched $85 a barrel last week, the highest level they’ve seen since 2014. Several stock market watchers argue that allowing oil prices to run free would’ve been better in the long run, and prevented the heartburn for oil marketing company shareholders.
But the Indian government was under pressure to act on rising fuel prices, both from ordinary citizens and an aggressive opposition which was looking to turn it into an election issue. And while the common Indian will likely rejoice the Rs. 2.5 cut in fuel prices — it’ll make their commutes cheaper, and also restrain overall inflation — it’s come at the cost of an unexpected haircut for the country’s many oil market company investors.