OILY MESS
Business Today|April 18, 2021
A sharp increase in global crude oil prices has pushed retail rates of petrol and diesel to historic highs. Taxes are partly to be blamed, but reducing excise duties may not be easy for a cash-strapped government
SUMANT BANERJI

On January 19, Minister for Petroleum and Natural Gas Dharmendra Pradhan came down heavily on oil-producing countries for going slow in ramping up supplies and artificially inflating global crude prices. “A few months back we were discussing about consumption-centric economic revival, demand revival, and we are supposed to restrict our production cuts and gradually ramp up production by January — but in contradiction to that, we are now controlling oil production,” Pradhan said at an energy conference organised by the Atlantic Council. India is the third-largest consumer of energy in the world and imports 85 per cent of its crude requirement every year. Prices of the Indian crude basket have gone up from $40.66 per barrel in October to a shade under $70 per barrel today, a rise of nearly 68 per cent within six months. High oil prices have a debilitating impact on the country’s fiscal maths.

Petrol Hits A Century

Retail prices of petrol and diesel have mirrored the trend. Since October, petrol and diesel prices have gone up by over ₹10 per litre in Delhi and are at their all-time highs. It is much worse in other parts. In mid-February, petrol prices crossed the psychological ₹100-per-litre mark in Rajasthan’s Sriganganagar district. Since then, the barrier has been breached in over two dozen districts — mostly in the states of Rajasthan and Madhya Pradesh. Even in Mumbai, a litre of petrol costs a high ₹97.19 (as on March 25).

At a time when the revival in the domestic economy is just beginning to gather steam, this has come as a vicious curveball, alienating consumers and pushing the government in a huddle. “Due to an increase in prices of crude oil in international markets, consumer price (for petrol and diesel) has risen. This will soften gradually. Global supply was reduced due to Covid, affecting production as well,” Pradhan had said during another event on March 13. “We are in talks with oil-producing countries to reduce prices.”

Putting the blame for high prices of the two fuels at the pump entirely on the vagaries of the international market is, however, only one side of the story. The government can't slap the blame for the other. In July 2008, global crude prices hit a record high of $132.47 per barrel, but domestic prices, which were subsidised and regulated at that time, were much lower at ₹50.62 per litre for petrol and ₹34.86 per litre for diesel. Then again in March 2012, crude prices hit $123.61 per barrel but a litre of petrol, which wasn’t subsidised then was 65.64, while diesel, which was still regulated, was priced at ₹40.91. The discrepancy in pricing between then and now is due to a steep increase in taxes. In the case of petrol, excise duties that go to the central exchequer and value-added taxes (VAT) that go to the state government, together account for ₹54.58, or over 59 per cent, of the retail price in Delhi. For diesel the figure is ₹43.74, or 53.7 per cent.

Milking The Oil

Over the last few years, the government has increased taxes on fuel to offset revenue losses from other sources. Between FY15 and FY20, excise duties were raised a record 12 times and lowered only twice. In effect, excise duty on petrol and diesel since April 2014 till today has gone up by ₹23.42 per litre — an increase of 247 per cent, and ₹27.3 per litre — an increase of 607 per cent. Similarly, VAT has also gone up by ₹9.14 per litre on petrol and ₹5.33 per litre on diesel, an increase of 77 and 80.6 per cent, respectively.

At the same time, diesel prices were deregulated in October 2014 (for petrol it was done in 2010 itself), which resulted in a steep decline in under-recovery and subsidy burden that the government had to bear on oil — from a high ₹264,387 crore in 2012/13 to just ₹26,621 crore in 2019/20, a 90 per cent decline. The contribution of the sector to the coffers of the Central and state governments through excise duties and VAT — which is ad valorem so increases with the overall rise in prices — has ballooned during the same period from ₹278,661 crore to ₹555,371 crore, a growth of 99.3 per cent. For everybody, low oil prices are a bonanza.

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