High fuel prices

When it comes to petrol and diesel prices, the general consumer can be forgiven if he thinks ruefully that whatever little relief the government gives with the right hand, it takes away with the left. Recently, intertiol prices of crude oil rose reportedly due to two powerful hurricanes (Harvey and Irma) impacting oil refining in the US. Presently, crude prices are down due to ‘oversupply’ and hovering at around 50 dollars per barrel. Three years back in 2014, crude prices were hitting 105 dollars per barrel. And yet in India, petroleum and diesel prices presently are at a 3-year high. There is little respite for the consumer, and much bewilderment. Doesn’t the country now have a daily price revision mechanism, through which benefits of falling intertiol prices are passed on to consumers in a day? Well, there are wheels within wheels as far as retail oil prices in India are concerned. Oil revenues are welcome to the government’s coffers and provide much fuel for ruling and opposition parties to do their bits of political posturing. The Congress is now calling the NDA government at the Centre “economic terrorists” for burdening consumers with fuel prices among the highest in the world. When crude prices were ‘falling’ in the intertiol market continually since 2015, the Centre raised excise on petrol by around Rs 12 and on diesel by over Rs 13 per litre in several instalments, the Congress has pointed out. The 2016-17 Economic Survey too has noted that the Central government has hiked excise duty on petrol by as much as 150 percent since July 2014.

The opposition criticism must have hit home somewhat, for the Centre on Tuesday cut the excise duty on petrol and diesel by Rs 2 per litre, a move which will cost the exchequer Rs 13,000 crore during the remaining part of the fiscal and Rs 26,000 crore for the full fincial year. According to the Ministry of Petroleum and tural Gas, this decision is being taken to cushion the impact of ‘rising’ intertiol prices of crude oil on retail sale prices of petrol and diesel, and thereby ‘protect the interest’ of common man. What the common man has to appreciate is that oil revenue is such an important source of revenue that it has been kept out of the purview of Goods and Sales Tax (GST) altogether. While the Central government imposes excise duty on petroleum and diesel and keeps hiking it, State governments too take their cut with hefty VAT (value added tax) rates. And VAT rates vary widely from State to State. The ruling Aam Aadmi Party (AAP) in Delhi has been demanding that the Centre should direct oil PSUs ‘to pass on benefits’ of falling crude prices to consumers. But any consumer in Delhi would have gotten a jolt doing the math of retail price paid for petrol or diesel at the pump. With Delhi government charging VAT at 27 percent and Central excise levied at Rs 21.48 (now Rs 19.48) per litre, taxes on petrol at the country’s capital comprised over half (52 percent) its retail price. As for diesel prices, taxes made up 44 percent of it. In comparison, petrol is selling cheaper in rupee terms by Rs 28 in Pakistan and Rs 20 in Sri Lanka.

When Union Fince Minister Arun Jaitley was recently asked about constant high prices of petrol and diesel, he said that the government needs oil revenue to build infrastructure and fund social welfare schemes. In this context, he made the point that there is ‘hardly any private investment’ to drive the country’s growth. And of the tax that the Central government collects from petro products, 42 percent goes to the States, he added. Former Prime Minister Manmohan Singh too warned recently that the country’s economy is presently running on “just one engine of public spending”. So with growth down to 5.7 percent, consumption yet to pick up after demonetisation, exports stuttering, trade deficit at a 4-year high of 2.4 percent, teething troubles with GST and private investment remaining dry, the Central government is operating on a tight margin. The prospects of being called upon to prime the economy with a stimulus package amid the Reserve Bank’s concerns over ‘fiscal slippage’ are surely daunting. In this context, how the government mages the petrol-diesel pricing in coming days will bear watching, with its implications on raising inflation. As a recent RTI query revealed, the Centre made a windfall from excise and other indirect taxes on fuel in last 5 years, its earning rising three-fold to Rs 2.67 lakh crore last fiscal. For both Central and State governments, oil revenue has been a much used cushion, with little benefit of low intertiol crude prices passed to consumers. It is a necessary evil at best and a distortion at worst, and has to be recognised as such. In this context, proposals for a mechanism to cut tax rates when intertiol crude prices go up merit consideration.