Custom case of too little, too late

India’s policy-move to help the local users of petrochemicals will yield limited benefit, both in terms of period (three months), and costs (a mere five per cent). On Thursday (April 2), the Government exempted 40 petrochemicals from the payment of basic Customs duty. Applicable until June 30, 2026, or just about here months, an analysis by us reveals that the average cut will translate into an average saving of five per cent, thanks to several factors. In actual terms, the duty cuts may range from a low of 2.5 per cent to a high of 7.5 per cent.

However, the list includes crucial inputs and raw materials for crucial sectors such as textiles, plastics, fertilisers, and soaps and detergents. Yet, one is not sure of the benefits that will accrue to the user industries. This is because the decrease is in basic duties, but the other tax components such as IGST and anti-dumping will continue to apply on some of the petrochemicals. According to our database, eight of the 40 items mentioned in the notification are subjected to the anti-dumping duties, which are not covered under the exemption.

One needs to add that given the near doubling in global naphtha price to $1,100 per tonne, dumping may have lost some meaning in the current context. Current prices may not allow global sellers to get rid of the products at below-market rates, and five per cent effective-average duty cut may not support under-invoicing of imports. A similar conclusion will hold for non-tariff barriers, which are not relevant during periods of severe shortages in the world market. At present, India imports about half of its petrochemical requirements.

What is relevant is that the 40 petrochemicals are only a part of the $100 billion petrochemical import market, which is still subjected to a rather high import tariff of 7.5 per cent on most products. Importers need to pay a social welfare surcharge on top of it. Couple this with IGST of 18 per cent, and the end-result is a duty liability of 27.735 per cent. If the average cut is five per cent, or less than a fifth of the overall duty, due to the basic relief, importers or users are unlikely to benefit much from the move, though it is a step in the right direction.

Consumers will get some relief but the measure will hardly solve the problem of price rises. The Government may be better off, or users may be in a better position, if the former switches over to a system of Customs duties and IGST that are based on the global prices of crucial and sensitive petrochemicals indicators, like naphtha. This will factor in the dynamic and changing international prices in the domestic system and equations. As it is, the users have suffered the price rises during March, and the relief begins in April, and lasts till June.

According to reports, the fertiliser industry, and select components of the petrochemical users have lost a lot, and have been hit the worst during the past month. The current measure, which is applicable for only three months, will compound the confusion and distortion in the economy, besides hurting the producers and government revenues. One hopes that the June deadline is not a fixed one but a flexible one, and if the Iran war continues, the Government may extend the deadline, and further reduce the duties over the next few weeks.

Although the duty cut will impact several Indian refiners, and one of the worst sufferers in the private sector may be Reliance Industries, which is the country’s largest producer-user of several items in the list. According to reports, there may be higher competition from imports, which may put downward pressure on local prices. It will translate into low prices in the user segments such as plastics, packaging, and textiles. Hence, a vertically-integrated business, like Reliance Industries, may be hit at both ends, inputs and finished products.

In the recent past, Reliance Industries, along with the other refiners, was slapped with windfall taxes on jet fuel and diesel, although petrol remained untouched. This was abolished in 2024, after being introduced in 2022 in the wake of the Russia-Ukraine war. A combination of windfall taxes, although limited, cut in import duty, restricted to 40 items at present, lower refining margins, and high crude oil prices may have a complex impact on Reliance Industries’ revenues and profits. Experts and analysts are still trying to gauge the overall effects.

One of the prime reasons, as we stated earlier, is that the windfall tax is only on two products, although they are major ones. According to media reports, of the two refineries that the firm operates, one domestic and the other export-oriented, the latter may not need to pay the windfall tax. Hence, the impact will be less than expected, or minimal. In the same way, since the petrochemicals businesses are integrated with the downstream user ones in Reliance Industries, which is both a producer and user, it may be in a better position, compared to others, to absorb the impact on competition, and local prices.

However, the volatility in the stock price movement of Reliance Industries in the past month shows the uncertainty among the investors. From a price that was below INR 1,350 on March 4, five days after the beginning of the Iran war, it shot up to almost INR 1,425 within five days, then moved down and up, before settling down at around INR 1,350 yesterday. Hence, it gained INR 75, or more than 5.5 per cent from the month’s low, and then shed the gains over the next three weeks or so, largely because of the windfall tax, and import duty cuts.

Before the announcement of the windfall tax, analysts had estimated that “if gasoil, gasoline, and jet fuel cracks sustain at about $15, $5, and $15 per barrel above historical averages in the first half of 2026-27, Reliance Industries’ EBIDTA could increase by INR 17,000 crore, lifting its FY27 EBIDTA by nearly 8.5 per cent.” Earlier, in 2022-23 and 2023-24, the firm’s EBIDTA rose by 18 per cent, and remained stable, respectively, because of the Russia-Ukraine war. The upward profitability curve may still turn out to be true if the firm’s SEZ refinery does not pay the export tax. There is some lack of clarity on the issue, although reports indicate that the tax will not be applicable.

(The author is Director, Academy of Business Studies, New Delhi); views are personal