Oil duty hike defeats idea of decontrol

Two recent hikes in the excise duty on petrol and diesel, announced by the government within a period of two months, violate the spirit of the idea of deregulation of petroleum prices which it seemed had finally been accepted as part of oil sector reforms.

Both the NDA government and the previous UPA had dithered on it. With the freeing of diesel prices one important step was taken towards effective deregulation. But the quick imposts on diesel and petrol may have turned the clock back.

Last week, excise duty on petrol was raised by Rs 2.25 a litre and on diesel by Re 1 a litre. There was a similar increase of Rs 1.50 a litre a few weeks before that. The latest hike would give the government a tax income of between Rs 4000 cr-4500 cr and would, to some extent, help meet fiscal deficit target.

Oil price deregulation is meant to ensure that an increase or decrease in international prices should be passed on to the market. But the tax levies imposed now are being absorbed by the oil marketing companies (OMCs). All state-owned OMCs have decided to do so.

It is difficult to imagine that they would have taken this decision without pressure from the government. This is because bearing the burden of the impost would go against the commercial interest of these companies. They may not even have announced a cut in petrol and diesel prices to the extent they did just three days before the excise duty hike, if they had known it was coming.

The idea of passing the benefits or costs of price fluctuations in the market to the consumer, which is central to deregulation, was breached by the duty hike and the absorption of the hike by the oil marketing companies.

If the global oil prices fall further, which is likely, the OMCs may not pass on the benefit to the consumers by reducing the domestic retail price but may adjust it against last week’s duty hike. This militates against the deregulation process. It was this temptation to meddle with the process that had defeated the claimed aim of earlier governments to make deregulation of oil prices free and transparent. 

A higher tax regime in respect of oil products in itself may not be bad because it can encourage energy conservation and use of alternative sources. But to be effective, it has to be aligned with the policy of price decontrol. It is here that the government’s commitment to that idea has come into question.