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Rising fuel burden

Sentinel Digital DeskBy : Sentinel Digital Desk

  |  26 April 2018 12:00 AM GMT

Crude oil prices are surging globally, up by 24 percent in the first 3 months of 2018, and the Central and State governments would like the people to believe this to be the sole reason why domestic fuel prices are on a high. Diesel is retailing at the highest rate ever, Rs 65.93 in Delhi and Rs 68.83 per litre in Guwahati. Petrol too is at a 4-year high, going at Rs 74.63 in Delhi and Rs 76.73/litre in Guwahati, as on Wednesday. The news coming from global oil markets indicate there is little hope of crude prices crashing anytime soon, despite the US strategically increasing its shale oil production. Middle East tensions show no signs of abating, while Saudi Arabia is pushing oil exporter bloc OPEC to cut production and thereby ensure profits. With the general elections in India looming next year, this development is being viewed as challenging for the ruling dispensation at the Centre. With petrol prices already going past the psychological barrier of Rs 80/litre in the country’s financial capital Mumbai, it is being speculated that the government may be forced to intervene soon. Currently, inflation is holding steady at around 4.3 percent, but higher fuel prices could strongly rock the boat. So will the Central government cut excise duty on production (refinement) of fuel to ease the situation? The Centre has indicated its reluctance to do so — the Union Finance Minister reportedly nixed a proposal to this effect by the Petroleum Ministry while presenting the general budget this year. The reason put forth is that a cut in excise duty on fuel by Rs 1 will inflict a loss of Rs 13,000 crore to the exchequer. This could jeopardise the Central government’s target to bring down fiscal deficit to 3.3 percent of GDP. Directing the oil marketing companies to absorb the fuel price hike is also not a preferred option. Rather, the Centre would prefer the State governments to reduce VAT on sale of fuel. Let us remember that around half the price consumers in this country pay for petrol actually go as taxes to the coffers of Central and respective State governments. Since there can be no reduction in demand for fuel even when it is priced high, both the Central and State governments actually vie to tax it so as to fund their own development agendas. The urgency to do so has to be viewed in the context of far less than expected investment by the private sector in infrastructure.

Petroleum Minister Dharmendra Pradhan has pointed out that the Centre has to rely on the fuel revenue source “to fund massive highways, road development plans, railway modernisation and expansion, rural sanitation, drinking water, primary healthcare and education,” what with allocation on all these heads going up significantly. If such is the dependence of the Central government on fuel excise duty, the dependence of economically much weaker State governments can well be gauged. In fact, State governments also impose other taxes like cess and surcharge on fuel sales, along with VAT, and often fix minimum sale prices. This has resulted in fuel pricing becoming so warped that fuel retails at nearly twice the pump rates across the country. As per a costing analysis of IOC data in September 2017, it came out that while consumers in Delhi were buying petrol at Rs 70.52 per litre, it was costing only Rs 27.77 per litre at the refinery. In turn, the refinery kept a profit of Rs 2.71 while selling to the dealer, the dealer took commission at Rs 3.57, the Centre charged excise duty at Rs 21.48 and Delhi government charged VAT at Rs 14.99 rates. Thus it is that petrol and diesel retail at the highest rates in India compared to its South Asian neighbours. As on April 1 this year, petrol in rupee terms was being sold at below Rs 49/litre in Pakistan and Sri Lanka, and below Rs 69/litre in Bangladesh. It speaks volumes that these three countries, despite their economies being far smaller in comparison to India, are giving their consumers a much better deal on fuel prices. What is more, consumers in India keep forking out almost the same high prices for fuel year after year, irrespective of whether global prices are falling or rising. When crude prices plummeted from above $ 100 per barrel in March 2014 to $ 50 in September 2017 and rose again to $ 63.8 in March 2018, Indian consumers shelled out prices in the range Rs 74 to Rs 70 and up to nearly Rs 80. Between November 2014 and January 2016, the Central government seized the opportunity of falling global oil prices to raise excise duty nine times to shore up its finances. Meanwhile, the country’s dependency on fuel imports is now touching 82 percent, with little initiative in discovering more oil reserves or diversifying its energy mix. Be as it may, the country’s economic planners need to bite the bullet and bring some rationalisation on the fuel pricing front. They could start with another push to bring petrol and diesel sales under GST, for which State governments will need a high degree of persuasion (read compensation). Even if fuel is taxed at the highest 28 percent GST slab, it will give consumers much needed relief.

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