Rising fuel prices: Gov’t tries to obfuscate the truth… again!

Image Courtes:haribhoomi.com

The petrol prices per litre have breached the century mark per litre across many metros recently. It is not the fuel price alone that is burning a hole in the pockets of common citizens. In the past year and a half, prices of several essential items have shot up drastically so much so that tens of thousands of households have their backs to the wall. Grocery store owners said their hands were tied because they were having to buy stuff from wholesalers and distributors at a much higher rate than before, suggesting hoarding. Added to this, the slowing down of the economy, unemployment, job cuts, salary cuts & the Covid-19 pandemic all make it a bitter pill to swallow for the citizen. How will our economy reach the five trillion-dollar milestone & be a Vishwaguru is in itself a million-dollar question. 

On the face of it, the Oil Manufacturing Companies’ decision to resume daily price resetting would appear to be in broad conformity with the pricing deregulation that the Centre has been intermittently committed to ever since the government of the day freed up petrol prices in 2010. However, the timing of the recent moves to raise levies and retail prices by the governments and fuel marketers, respectively, is at odds with logic especially at a point when the country is grappling with the impact of a pandemic. The aim of maximising takings from fuel products to offset shortfalls in other revenue streams can only bear fruit if the petrol and diesel off-take remain unaffected and the rising fuel bill does not end up depleting household consumption budgets. The lockdowns imposed to contain the spread of COVID-19 having severely hit business activity at all levels, the onus is on the governments — both at the Centre and in the States — to facilitate the resumption of economic activity in every manner possible. Given that diesel is the primary fuel for the vast and essential road freight sector, every incremental addition to haulage costs ends up dampening both the transport industry and wider economic revival.

How are fuel prices computed in India?

India meets its domestic oil demand mainly through imports. Fuel prices in India are revised daily based on the changing crude oil prices globally. As global crude oil prices go up, the import cost also increases. But that’s just one reason for the high retail prices. The remainder of the amount is just state and central government taxes. A major reason for the high selling price of petrol is the high levy of local taxes. The Union government levies excise duty and cess on fuel, and states levy a value added tax (VAT).

In 2010, the prices of petrol were determined by the government and were revised every fortnight. In 2014 the price of diesel was also deregulated and since 2017 prices are being revised on a daily basis. Since then, the public sector Oil Marketing Companies make decisions on the pricing of petrol and diesel based on international product prices, exchange rate, tax structure, inland freight and other cost elements, according to a response in the parliament. Some state-run companies such as Indian Oil Corporation Limited Bharat Petroleum Corporation Limited and Hindustan Petroleum Corporation Limited fix retail prices of petrol and diesel in the country.

There are mainly four factors that influence the hike in fuel prices. These are (a) Crude oil, freight and processing charges to the dealer. (b) Excise duty charged by the government. (c) Dealer commission to the gas station. (d) Value Added Tax levied by the state government.

India imports about 82% of the required crude oil for its petroleum products. Crude oil is a dark sticky liquid that cannot be used without refining. It is heated until it boils and is then separated into different liquids and gases in a distillation column. This is used to make petrol and diesel. While Brent Crude is the international benchmark price used by the Organisation of Petroleum Exporting Countries (OPEC), West Texas Intermediate is the benchmark for United States oil prices. Since India mainly imports crude oil from OPEC countries, (Iraq, Iran, Kuwait, Saudi Arabia and Venezuela) Brent is the benchmark for oil prices in India. Brent crude is extracted from the North Sea of the Atlantic Ocean whereas West Texas Intermediate is usually extracted from US oil fields in Texas, Louisiana and North Dakota.

Worldwide taxes are levied on fuel. The following figure explains this:

At present India has the highest percentage of tax on both petrol & diesel making it one of the nations with the highest dose of taxation. Taxes now comprise over 69 per cent of the pump price of the two fuels. The following table shows the value of US dollar vs. Indian rupee since May 2014.

Source: Thomas Cook website(https://blog.thomascook.in/1-usd-to-inr-from-1947-to-2020/)

The value of the Indian rupee is largely related to crude oil prices. As oil price increases, the value of Indian currency also decreases, and vice versa. The withdrawal of foreign investors from the Indian market is another contributing factor. Government debts can cause investors to lose interest in the country’s market, resulting in inflation. Factors like these may combine with several others to cause further depreciation of the INR in the future.

Now we compare the international crude oil prices per barrel which is given in the table below for the same period:

Source:(https://www.opec.org/opec_web/en/data_graphs/40.htm)

The comparative prices of petrol in some of the countries are shown in the figure below:

But it is disconcerting that over the three weeks ending June 23, 2014, the spot price of Brent Sea crude rose from around $100 a barrel to more than $115 a barrel. At present, the price of crude oil is $71.32 a barrel. The month wise price of Indian basket crude oil & the retail selling price of petrol and diesel at Delhi during 2014 are given in the table below:

Source: (Reply to RS unstarred question-1090 answered on 4th March 2015 on “Comparative prices of crude oil in 2009 & 2014)-(https://pib.gov.in/newsite/PrintRelease.aspx?relid=116436)

The table below shows the retail selling price of petrol & diesel in Delhi during 2015-16 to 2020-2021 as given by the Petroleum Planning & Analysis Cell. (https://www.ppac.gov.in/). The cut-off date for each year is April 1.

The ordinary citizen will surely then wonder how the retail price of petrol has hit the century mark. The aforesaid tables show a different picture altogether. The fuel prices in the domestic market were supposed to fall as a result. But they are skyrocketing. This is because of the governments’ unscientific taxation policy. At present, petroleum products are under excise duty & VAT. The following table shows the breakup of both petrol & diesel price in Delhi (source: IOC website) that will make the above point clear.

The excise duty for a litre of petrol has risen from ₹9.48 a litre during the previous regime to ₹32.90 a litre in the present regime. The excise duty for diesel has risen from ₹3.56 a litre to ₹31.81 a litre in the same period. The present regime is misleading citizens by saying it has to pay for the oil bonds of the previous regime. The exorbitant rise of taxes is the primary reason for the skyrocketing fuel prices in the domestic market despite a steep fall of crude oil prices in the international market. If taxation is rationalised, the fuel prices would automatically come down. The cess was meant to be used for the development of the oil sector, but this never happened. If the funds had been used for the stabilisation of prices, the recent hike could have been avoided.  In practice, petroleum products are produced in refineries in India. One can understand the case for aligning Indian crude oil prices to international prices because 82% per cent of our requirement is imported. But there is no case for applying this method to oil refining, in which India is more than self-reliant (in fact, private companies such as Reliance export petroleum products). The opposition parties have been highlighting the fact that the whole point in promoting self-reliance is to establish entities in India to act as countervailing forces that would insulate the country from high prices in the global markets. If the current pricing system continues, even if India is completely self-reliant in crude oil and refined products, the consumer would still have to pay prices that are determined globally, even if the cost of production in India is lower. This is the biggest anomaly in the system that prevails, after the dismantling of the APM. In fact, this system is loaded against self-reliance. Even when a downward trend in international fuel prices had been observed, the benefit was never passed on to the people. It was neutralised by a higher incidence of indirect taxation, at both the Central and State levels. The ability of State governments to manoeuvre is far less than that of the Centre. The oil price hike has burdened the already strained State finances and threatens to jeopardise welfare programmes run by State governments.

In a reply to an unstarred question no-4309 in the Lok Sabha on March 22, 2021, the government had to reveal the amounts in tax collection on petrol, diesel & gas as a percentage of the Gross Tax Revenue Budget Estimates; figures show how this has increased. The year wise collection from 2013-14 to January 2021 are given below contained in the annexure to the reply in Parliament:

Conclusion

While income has not gone up, expenses have shot through the roof in hundreds of thousands of Indian households. A family which spent an average Rs 2,500 per month on groceries before the pandemic is now spending Rs 4000 per month. A litre of edible mustard oil which was sold for Rs 120 has now crossed Rs 200. Such a surge in prices has impacted the buying pattern of people as well. The price rise has hit harder because the virus has robbed many of their income and stalled the income of many more. The freezing of central government employees & pensioners dearness allowance given to offset the hike in prices has also added to the overall misery. High prices are also expected to inflate India’s current account deficit. In some States such as Kerala, trawler boat owners once engaged in deep-sea fishing are staring at a bleak future with the price of diesel going continually up and loss of significant number of fishing days owing to COVID-19 restrictions. The steep rise in the price of diesel too has been a big drag on fishing operations. An analysis of LPG hike will be taken up in a separate article.

Some crucial suggestions are being offered for bringing down the fuel prices. One is that the Central government reduce excise duty and also rationalise taxes on petroleum products. Two, the State governments reduce VAT. (Recently Government of Tamil Nadu reduced the price of petrol by three rupees per litre). Three, petroleum products should be brought under GST framework: with the establishment of a price stabilisation fund that can be funded by a cess for every tonne on the oil-prospecting companies like ONGC or Oil India.

The previous government had the vision to start the Indian Strategic Petroleum Reserves Limited (ISPRL)(http://www.isprlindia.com/) in 2005 to maintain crude oil stock. The present regime is not using this even while the oil prices are rising. There are about 55 lakh metric tonnes of crude oil stocked at the ISPRL facilities. It is both strange and questionable why the present regime has not released this stock despite the oil prices going sky high.

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Democracy, anyone?