JOIN USOil prices:Make consumer gain
In an age when the automobile permeates our very existence, governments are reluctant to entrust automotive fuel supply entirely to markets. In India, in the absence of adequate mass public transport, demand for fuels like petrol and diesel is virtually price inelastic.
Diesel prices can hugely impact inflation in our vast country where goods are perennially shifted from one corner to another by road and railways to meet the galloping demand. That India imports four out of every five barrels of crude required to fuel a rapidly developing economy adds to the complexity. The Indian consumer is a price-taker and anyone who can interfere with prices wields unlimited clout.
No wonder then that prices of petrol and diesel are intensely political. They have been used by governments as a political tool to dispense favours in return for votes. More importantly, in an economy where direct taxes contribute only a fraction of the total government revenues, indirect taxes on petroleum products become a milch cow for governments ever in quest of additional revenues to support their bloated budgets.
For instance, in 2013-14, the petroleum sector contributed Rs 3,05,360 crore to the exchequer. Nearly half of it was mopped up by the Central government. It contributed 9 per cent to the Centre’s budgeted plan and non-plan expenditure for the year. Considering fuel taxes are embedded in almost every commodity, most of it is paid for by the common man.
Time and again, governments have made an attempt, at times sincerely, to let go control of auto fuel prices, but clawed back, covertly or overtly. In 2002, we were told that administered pricing mechanism had been dismantled and henceforth, prices of petrol and diesel would be adjusted every fortnight in tune with global crude prices.
With global oil prices on an unprecedented upward spiral after the Iraq war, the announcement, albeit based on sound economics, turned out to be politically unwise. The invisible hand of the government ensured that the decision was never implemented so that consumers were shielded from price shocks, in return for expectation of votes in the many central and state elections that are always round the corner.
This restraint on petroleum product prices gave rise to spectre of ‘under-recoveries’ of Oil Marketing Companies (OMC). Under-recoveries, it is often maintained, are implicit subsidies. But before we quarrel with the nomenclature, we need to understand how these ‘under-recoveries’ are computed. Public Sector OMCs are integrated refining and marketing companies. They import crude from the international market, refine it and market it in the country.
Instead of allowing OMCs to arrive at their costs and compete in the market place, the government fixes their product prices. For instance, from 2006, OMCs’ prices of petrol and diesel are arrived at through a mechanism called trade parity. Trade Parity Price (TPP) is an average of 80 per cent import parity plus 20 per cent export parity price on petrol and diesel, on the premise that 20 per cent of the product of our refineries is exported.
In the event, the price is only marginally less than what an Indian consumer would have paid, had she imported petrol or diesel directly from the global markets. TPP includes notional levies of customs duty plus notional ocean freight plus notional insurance on notionally imported petrol or diesel.
These notional levies are already embedded in the refinery gate price of the OMCs and get passed on to the consumer at the pump. It is another matter that the OMCs have not been able to recover TPP fully because the invisible hand of the government restrained them from doing so during periods of high crude prices. The unrecovered portion of TPP is called under-recoveries which of course, are not the same as losses!
Levies on petroleum products
Now we come to explicit levies on petroleum products. While Oil Marketing Companies (OMC) are still computing the exact share of taxes in the pump price now after the drop in global crude prices, not long ago, half the pump price of petrol and a third of the pump price of diesel used to be only taxes and levies.
Of the Rs.3,05,360 crore contributed by the petroleum sector to the government in 2013-14, indirect taxes and levies on petroleum products (netting out levies on crude, income tax and dividend paid by oil companies to the government etc) alone came to approximately Rs.2,23,000 crore. Compare this with the total under-recoveries for the period which amounted to Rs.1,39,869 crore. The government is not subsidising petroleum consumers. In fact, it is quite the opposite!
Timing is everything when it comes to politically difficult decisions like deregulation of diesel prices. Petrol prices were decontrolled once again in June 2010, but more inflationary diesel prices were left alone. In January 2013, the then government took the decision to increase diesel prices by 50 paise every fortnight to bring it on par with international prices. With the latest decision to deregulate diesel prices and leave them to the OMCs, the government seems to have got the timing right.
Falling crude prices provide an unprecedented opportunity to bestow some benefit on the beleaguered Indian consumer. Yet, even as it announced its decision to free up diesel prices, the government could not resist the temptation to appropriate a portion of the benefit that should have accrued to the consumer.
It imposed excise duty hike of Rs 1.50/litre on both petrol and diesel to mop up the windfall from falling crude prices. This measure has little to do with keeping galloping demand in check in a price-inelastic market, but everything to do with shoring up government finances. Lack of transparency in fuel pricing enables the government to get away with this.
There is little justification for this, considering that the government had, for years, enjoyed windfall revenues from the ad valorem taxes on crude and product prices when they were spiralling upwards.
After much persuasion, the government finally shifted to specific levies, a salutary move which keeps government revenues neutral without punishing the consumer when crude prices spiral. Now to deprive the consumer of the small benefit she gets on account of factors external to the Indian government through this levy can only be termed opportunistic.
THE OIL MATHEMATICS
Computation of petrol and diesel prices in India (January 2015 prices)
Crude oil: $48/barrel
Rupee-dollar exchange rate: Rs 62/dollar
On importing oil: barrel cost + ocean freight at $2/barrel, implying - $50 per barrel as import cost.
(One barrel is equivalent to 159 litres)
Processing cost in refineries Rs 4 per litre + transportation + freight +packing + refinery margin is another Rs 3.50 per litre
Gross cost after refining crude oil: Rs 27 per litre
Till now, petrol and diesel cost the same in India
Calculating final price of fuel
Import duty Rs 4 for petrol
Rs 2 for diesel
Commission to petrol pump owner:
Petrol: Rs 2 per litre; Diesel: Rs 1 per litre
Till now, petrol costs Rs 33/litre, Diesel Rs 30/litre
Taxes on petrol and diesel
nExcise Duty (including Education Cess - as on January 24, 2015)
Petrol: Rs 17 per litre; Diesel: Rs 10 per litre
(There has been four excise duty hikes since November, 2014)
nVAT on gross price including excise at the rate of 20 per cent
nFinal price of fuel: Rs 59/ litre for petrol
SOME OIL FACTS
The latest hike in excise duty on petrol and diesel is the fourth hike in excise duty since November
Customers would have otherwise been benefited of Rs 7.75 per litre in petrol and Rs 6.50 a litre in diesel rates through reductions
These benefits were warranted due to the slump in oil price to $46 per barrel in January
The four excise duty hikes to result in about Rs 20,000 crore in additional revenue in 2014-15 and to help the government meet its fiscal deficit target of 4.1 per cent of the GDP.
WHAT EXPERTS SAY ON HIKE IN EXCISE DUTY
There could still be some over-recovery by OMCs (Oil Marketing Companies) but one should not forget that oil companies need to have their own fiscal conditions sound so that they can invest, and service large projects in the future. “If they have suffered in the past and they are making little more money now, what is wrong in that? We should allow them to do so and at the same time not burden the consumer. Here consumer has had the benefit of reduced price on 10-12 occasions.”
R K Singh, former CMD, BPCL
The government should pass on some benefits toconsumers as well.”RS Sharma, former CMD, ONGC.
Instead of lowering the price for consumers, the government is raising the excise duty. Considering the fact that we should also control the consumption of petroleum and diesel products in the country, I would support this move and I don’t think it is particularly bad.”
Kirit Parikh, former member, erstwhile Planning Commission.
(The writer is an independentenergy consultant)