How to check fuel price rise

Not infrequently, either the rising or drop in crude prices, fuels debate particularly among the politicians. But, none when in power could find a long-term solution if not permanent answers.

The crude and the connected fuel prices are as volatile as stock markets. It either drops or rises sharply during a given time. For instance, the price per barrel was $94 in January 2014, peaked to $105 in June of the same year, dropped to $59 in December. In 2015 and 2016, it fluctuated between $37-$59 and $30-$52, respectively and in the year 2017, it hovered around $45 to $58.

Logically, the consumers, be it the general public or industry cannot complain when fuel prices rise based on rising crude prices, provided the prices are allowed to drop when crude prices fall. But in India, it is a one way street as the government rises taxes when prices are falling but does not drop the tax rates in a reverse situation.

The earlier price equalisation scheme was somewhat a solution to the above problem and giving it away was not a wise thing given the sensitivity of general public to fuel prices in the times of upward trend.

Sales tax structure

The main issue lies in the fact that the present sales tax on fuel are ad valorem ( i.e, based on sale prices), and this needs to be tackled in addition to having a relook at high rates of taxes.

One solution to the above issue is to change the sales tax structure from ad valorem to quantity-based rate of taxes. The rate thus could be determined based on the long-term weighted average rate of fuel prices over the last say five years. Such a rate should not be tampered with at least for the next five years unless there are compelling reasons.

In a market driven economy, consumers cannot complain on increasing prices as long as they are extended the benefit of decrease in prices too.

The fuel prices except items like kerosene and LPG do not directly affect the economically vulnerable sections of society.

That being the case, the above long-term weighted average rate should be the standard rate for retail pricing mechanism of fuel prices.

Fair scheme

Any increase or decrease in the retail prices due to international crude price fluctuations up to 20% of the above standard rate shall be passed on to consumers.

The reason being the governments shall intervene only by exception. Above this threshold, such an increase or decrease shall be shared between the consumer, the union government and respective state governments in the ratio of 5:2.5:2.5 respectively.

The dictum being the user shall pay but the governments would lend a helping hand too. The user unless bears a substantial portion of the increase, cannot be expected to use the fuel rationally, which in turn stems the rise in demand thus helping the prices to soften. To be fair, the private oil companies should be given an option to come under the above scheme.

Under any situation, the oil exploration or oil marketing companies shall not be made to bear even the part of price escalations since these companies are listed companies with public shareholding and if the government does so, it is not only highly unethical but also amounts to oppression of minority shareholders by a majority under the Companies Act 2013, inviting legal action.

This is more true in case of public sector banks which are being exploited by the governments to promote its policies, the cost of which being also borne by the public shareholders. The government should either buy back all shares of public or desist from interfering in the affairs of such banks.

The debate to bring the petroleum products under GST is nothing but a ploy to wriggle out of the current situation.

If the tax rates under GST, considering the outgo of input tax credit to business entities, are going to be revenue neutral, it makes no difference to the retail prices. If the GST rates are to be moderate to soften the retail prices, the same could be done under the present tax regime also.

Since the crude oil production is concentrated mainly in the US, Russia and the Middle East as these countries are always at logger heads, volatility in prices is a curse to live with. Also, the production shocks like sudden discovery and extraction of oil from new oil fields, unexpected increase in extraction of oil from existing fields and vice versa affects the oil prices. Similarly, popularly known as demand shocks, as sudden spurt in demand for oil in countries like the US for reasons like climate conditions or vice versa also affects the oil prices.

Out of the 100 countries producing oil in the world, the US, Saudi Arabia, the Middle East and Russia accounts for about 55,370 thousands of barrels of oil production per day. This amounts to about 60% of global oil production of about 92,150 thousands barrels per day as per 2016 estimates.

India just produces 856 thousands of barrels per day accounting for 0.92 % of global oil. However, India’s production of oil is about 20% of its oil requirements, thus leaving a deficit of 80% to be imported. From this data, it can be gauged how vulnerable India is when oil prices rise. The best solution for the government is to privatise oil marketing companies and live in peace.

(The author is CEO, Right India Consulting House (RICH), Bengaluru)