High fuel prices: What is the solution?

Oil prices are punching a hole in consumers’ pockets but the government doesn’t seem keen on stopping the upward spiral

On July 1, petrol was delivered at pumps for Rs 39.30 per litre. This precisely was the price charged to dealers but consumers have ended up paying over Rs 100 per litre for petrol for a long time. Rajasthan was the first state to witness petrol hitting Rs 100 a litre mark in mid-February itself. Similar is the case with diesel. While at pumps it is delivered at Rs 41.74 a litre. Many states have earned the distinction of diesel crossing the psychological mark of Rs 100 for a litre.

What prompts the rates to spike so much are taxes that the Centre and states separately levy on the two fuels. It is almost 60% on the landed fuel at pumps. In case of some states, it is even more. For example, Rajasthan levies the highest local taxes (value added tax or VAT) on petrol and diesel, followed by Madhya Pradesh, Maharashtra, Andhra Pradesh and Telangana. So, for these states the cumulative (Centre and states) tax component will be more than 60%.

India levies one of the highest taxes on petrol and diesel in the world. The revenue generated by transport fuels, for both the Centre and states, is so much that none of them appear too keen to bring these in the ambit of the Goods and Services Tax (GST). For example, the excise duty from petroleum products contributes up to 90% of all excise duty collected by the Centre. The Centre levies an excise duty of Rs 33 on a litre of petrol. The states charge Rs 23 or thereabouts. It varies from state to state because some of them charge high VAT. The government has always depended on taxes on petroleum products to fill the coffers but it has become more brutal since 2014. Just for the record, before May 2014, excise duty on petrol was Rs 9.48 per litre, a 230% increase in seven years. On diesel, central taxes were Rs 3.56 a litre, prior to 2014. Today it is at a kissing distance of Rs 32.

What explains such a breath-taking rise in fuel prices, which impacts the while gamut of the economy -- agriculture, transport, industries and inflation?

India imports almost its entire oil needs but that does not explain the rise. Take, for example, April of last year when the world was in the grip of the Covid pandemic and demand for fuels went down, crude oil then sold for $20 a barrel (one barrel is about 159 litres). Fuel prices for Indians should have come down substantially from around Rs 70 per litre. But, the Centre chose to raise taxes to the tune of Rs 10 a litre on petrol and Rs 13 per litre on diesel. This is an unusual time when the pandemic has necessitated the governments to raise taxes, but in other times too, the benefits of lower crude oil have rarely been passed on to the consumers proportionately.

Also read: In dig at Centre, opposition leaders share Vajpayee's 1973 petrol price hike protest video

Diesel is the most-used fuel in India and is directly linked to the growth of the economy. It accounts for close to 40% of all refined fuel sales in the country. According to the latest government data, the demand for diesel dipped 17% to 5.53 million tonnes month-on-month in May. Demand for diesel had been falling even before the pandemic. In 2019-20, it was a percentage point lower than in the previous year. For economic recovery to take roots, economists believe it is important that taxes on petroleum and its products are reduced. It happened during the global financial crisis of 2008-09 and gave an immediate push to the factory production and the economy.

High oil prices add to inflationary pressures. Inflation poses a challenge to growth. Record high prices for diesel means that the cost of transporting goods goes up across the country which in turn could result in increasing the prices of essential commodities like fruit and vegetables as well. Household incomes see a perceptible drop and gradually even the demand for discretionary goods starts declining.

Petrol and diesel have a combined weight of 4.69% in the wholesale price index and 2.34% in the retail price index. Any increase in the prices of the transport fuels affect the WPI more than the CPI but what is more worrisome is the pass through effect the increase in fuel prices can cause.

Reserve Bank of India Governor Shaktikanta Das too has urged the government for a calibrated unwinding of fuel taxes to reduce price pressure in the economy after consumer price inflation refused to ebb since the beginning of the year. India’s retail price inflation, which impacts the day-today lives of the common man, has hit 6.3% in May, according to the latest available numbers. This is half a percentage point higher than RBI’s threshold of 6%. It is the retail price inflation data that is mainly factored in by the RBI while setting the benchmark interest rates. The RBI will not be able cut the key interest rates till inflation remains high. That will hold the industrial and personal loans from becoming cheaper, which is the need of the hour at a time when the pandemic has hit India’s demand and consumption like never before.

The government can offset the prices by lowering excise duty slightly, which saw an exorbitant hike during March last year. This window, the experts say, is available to the government only this year. Next year, when the demand for transport fuels comes back to pre-pandemic levels and there is sharper upward revision, the risk to inflation will be much higher and may leave no ammunition with the government.

“Risks from higher oil prices are generally manageable in the financial year 2021-22, given the scope to adjust excise duty and other factors. But, risks are greater in 2022-23 based on our global oil price forecast, now revised up to $75 a barrel, from $60 previously for 2022,” Wall Street brokerage Bank of America Securities, said in a report.

Fuel prices in India are at record high even though Brent is well below its peak. But, responding to a question on increasing fuel prices, and whether the government was considering reducing excise duty, Finance Minister Nirmala Sitharaman recently said the duties on petrol are levied both by the Centre and the states and both would have to work together on this. On bringing petroleum products under GST, she said there were no hurdles from the Centre’s side, and the GST Council would have to take a call.

“Even when the GST was launched, there was an enabling provision made in the constitutional amendment that as and when the Council decides, it can always fix the rate and put it there in the GST. Once the GST Council decides, it will just be taken on board; amendment is not required again,” she said.

The question is, will the GST Council ever decide in favour of that? Who will want to let go a cash cow of its hands? Even if petrol and diesel are put even under the highest GST slab of 28%, which are imposed on luxury goods, the total tax on the fuel will only be 50% more than its landed prices, including a 22% cess that are levied on luxury goods. But the Centre and states will not be able to garner so much.

Prices of petrol and diesel in the neighbouring countries of China, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan and Myanmar are much less than that of India, according to globalpetrolprices.com that tracks retail prices of motor fuel, electricity, and natural gas in over 150 countries. None of these produce their own oil. They too import a substantial proportion but taxes in these countries are not as high.