Why petroleum prices may not come down anytime soon

The downward trajectory in prices may take time and even if the government steps in to reduce taxes, the relief could only be marginal

One common notification popping-up on people’s mobile phones recently is, ‘Petrol/Diesel prices are up for an “x” number of days in a row’. Alternatively, satirical memes going around make the comparison of the number of centuries scored by Indian cricket captain, Virat Kohli, and petrol prices in the last couple of years. Unfortunately, the latter has won the race to the landmark number of Rs 100 in at least some states.

The uneasiness in the surge in petroleum prices for individuals is akin to the surge in food commodities like onion, tomatoes, potatoes, pulses, rice and wheat, with the only anomaly being that the former commodities i.e., petrol and diesel, may not be a daily feature of some sections of the society.

The fact is that both the Central and State governments have focussed on off-setting lost revenues by hiking taxes on petrol and diesel. After closing in on the Rs 100 mark, individuals, especially those from the lower strata of the society, will ponder on whether a breather on petroleum prices is on the cards? The answer is probably not anytime soon.

There are a couple of reasons why the downward trajectory could be a prolonged one and even if the government steps in to reduce taxes, the relief could only be marginal.

Let’s see why this may be so. Firstly, to illustrate, the retail prices of petrol in Delhi as of February 17 was around Rs 89.6 per litre, a growth of around 25 per cent from the corresponding month last year. In this comparison, it is extremely clear that the hike in central excise duties from Rs 20 per litre in February 2020 to Rs 33 in May 2020 coupled with growth in state VAT by around 30 per cent have been the prime culprits for the increase.

During this period, crude oil prices have grown at a modest pace of only 9 per cent. However, what we are missing out is the price comparison during May 2020 to February 2021 where crude oil prices have almost doubled while central excise has been unchanged and states taxes have grown by 21 per cent as they are ad-valorem. The important point here is that month of May 2020 was the apposite month to hike taxes when crude oil prices had almost halved. The government’s actions then were pertinent as higher taxes were off-set by benign crude oil prices and stable petrol prices did not hurt consumers.

The off-set effect of May 2020 may not be available in February 2021 and even with Central government intervention of lowering excise duties it may not bring the desired relief as the demand-supply dynamics of global crude oil prices will be the critical factor outweighing the impact of tax reductions.

Secondly, the inelasticity of these commodities and exclusion from the GST ambit have been an important factor in pushing up taxes.

Consumption of petroleum products during June 2020 to January 2021 have surged almost to the corresponding period last year and is 7 per cent higher than 2018-19, once the unlocking process in the economy gained traction. So, despite the retail prices picking up, consumption has been upbeat. Even the government coffers have been supported by excise tax collections with the Central government’s kitty estimated to increase to around Rs 3.6 lakh crore in FY20 (RE) as against the budgeted estimate of Rs 2.67 lakh crore in FY20 (BE), despite the pandemic.

The average monthly collections during June 2020 to December 2021 has been around Rs 27,000 crore, almost 50 per cent higher than the corresponding period last year. The Central government has estimated an average monthly excise collection of around Rs 30,000 crore for 2020-21 and around Rs 28,000 crore in the forthcoming fiscal, which shows that the reliance on these taxes is likely to continue.

Thirdly, as the unlocking phase picks up further, a gradual albeit coordinated rollback of stimulus of both government and RBI will also pick up steam. As the timing of the rollback is crucial, likewise the reversal of tax hikes is equally imperative. However, for the latter to happen, the government will closely monitor the sustained pick-up in other tax components like GST, corporate taxes, personal income taxes, state excise and sales tax before thinking of bringing about excise duty cuts.

Consumers of petrol and diesel have been adversely impacted in the last couple of months and individuals still preferring private vehicles over public transport have had to bear the brunt of rising prices. Unfortunate is also the state of cab drivers whose spending on essential items and savings is likely to have gone for a toss.

Importantly, the domino effect of rising petrol prices on other components (especially food) has still not crept in and may further strain the purses of consumers. With challenges and uncertainty prevailing for both consumers and government and too many off-setting factors at play, the move from the landmark Rs 100 mark to the pre-pandemic price range of the 70s looks a distant dream and levitating in the 90s looks inevitable.

(Sushant Hede is an Associate Economist with CARE Ratings Ltd. Views are personal)

The views expressed above are the author’s own. They do not necessarily reflect the views of DH.