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Rising Oil Prices Not Just Hurting the Aam Aadmi, It's Hitting the Economy Too

Since more than three fourths of India’s oil demand is met through imports, rising consumption of petroleum products amid a price spike has raised our overall import bill and thereby also worsened the trade deficit.

Sindhu Bhattacharya |

Updated:May 21, 2018, 1:52 PM IST
Rising Oil Prices Not Just Hurting the Aam Aadmi, It's Hitting the Economy Too
Representative image.

The rising wave of anger against spiking prices of petrol and diesel, which have been on the rise for the last eight days, could drown the Centre sooner rather than later.

As the Opposition, business chambers and the aam aadmi come together to criticise the government over rising prices and its reluctance to cut duties, perhaps one should also understand that consequences of sitting on such a decision will also impact Indian economy.

The government needs to act, and act fast, if it wants to salvage any goodwill among the electorate in an election year. It could cut excise duty and try to make up the consequential revenue deficit by aggressive mop up from disinvestment, better GST compliance or through sundry other means.

The Centre could also ask BJP ruled states to simultaneously reduce state level duties on the two fuels so that the price relief is wider. It cannot expect the aam aadmi to pay for its inability to have a healthy fiscal roadmap.

As the State Bank of India’s Chief Economic Advisor said in a note this morning, with every $10 per barrel increase in global oil price, India’s import bill increases by around $8 billion, GDP falls by 16 basis points, current account deficit goes up by 27 basis points and inflation rises by 30 basis points. Assuming Re 1 excise cut after oil price hike, fiscal deficit will increase by 8 basis points with every $10/bbl increase in oil price.

Last year, the oil import bill increased by $22 billion and crude oil price jumped throughout the year to reach $70/bbl by March 2018 compared to $53/bbl by March 2017. Thus, $17/bbl increase in oil price led to shooting up of oil import bill by $22 billion. Simply put, rising oil is not only wrecking household budgets but also impacting our external competitiveness, GDP and stoking inflation.

So is the government listening? Petrol price today touched a record high of Rs 76.24 per litre and diesel climbed to its highest ever level of Rs 67.57 this morning in Delhi. Even then, there were conflicting reports in today’s newspapers over whether Oil Minister Dharmendra Pradhan did or did not indicate a cut in excise duties on fuels in a speech in Odisha yesterday.

India taxes fuel at a scorching rate and with global crude shooting through the roof due to geopolitical uncertainties, the only possible way to bring down prices is a reduction in taxes.

For a long time, the Centre has fired the tax salvo from the shoulders of states, saying they need to also bring down their own taxes to make the fuels cheaper. But as this tweet from Kerala Finance Minister Thomas Issac shows, the states are not willing to become the scapegoats in this war of perceptions.

Issac has, in fact, suggested a simple solution to bring down raging petrol prices to Rs 60 a litre.

“Let the central government give up the 300 percent tax increase they imposed since BJP came to power. Since state taxes are ad-valorem their tax revenue also automatically falls. After all, the states didn’t raise their rates.”

There were some reports this morning saying the Congress has already asked states where it is in power to reduce excise duty on petrol and diesel, but this could not be independently confirmed.

The Federation of Indian Chambers of Commerce and Industry also pitched for a cut in excise duty, with President Rashesh Shah saying: “Unless swift action is taken to address the situation, the economic growth will again head towards a speed-breaker. Amongst the most immediate actions that can be taken by the government is to bring down the excise duty on fuel.”

When the global oil prices were down, the government had hiked excise duty on fuel nine times between November 2014 and January 2016, but reduced it only once in October last year. Overall excise duty hike has been Rs 11.77 per litre for petrol and Rs 13.47 per litre for diesel, while reduction has been mere Rs 2 per litre.

So why does the government want to ride the wave of aam aadmi anger now, but does not want to cut duties? Every Re 1 cut in excise results in potential revenue losses of Rs 13,000 crore or 0.1% of GDP. Anyway, this is how the petro price math works: excise duty collections from high speed diesel (HSD) and petrol or motor spirit (MS) sales constitute 84-87 % of the overall excise tax collections of the government, according to a report by Integrated Research and Action for Development titled ‘Converging the divergence between diesel and petrol prices: A case for rationalisation of the Central Excise Duty’. This means 20 % or about a fifth of the government’s total tax collection comes from the taxes you and me pay to buy one litre of petrol or diesel. Why would the government then consider lowering these taxes and thereby significantly impacting its own tax receipts?

Here’s another number. As much as Rs 4.4 lakh crore was generated last fiscal by the government through various taxes and levies on petrol and diesel. The Centre accounted for 62% or two-thirds of the total revenue through such levies. Also, as explained earlier, any change in the excise duty on these fuels would anyway impact the VAT states levy.

According to analysts, till last year central taxes on these products ranged from Rs 21.5-Rs 22.7 per litre for petrol and 17.3-19.7 per litre for diesel. Then of course there are state taxes which vary for petrol from 20% in Mizoram to 48% in Maharashtra (Mumbai). In case of diesel they vary between 12% in Mizoram and 38% in Madhya Pradesh. While the central taxes are on the basis of per litre (specific), state taxes are ad-valorem and would tend to increase the final retail price when the base crude oil price changes. Any change in excise duty rates will affect the price on which state VAT/ST is levied and impact state VAT collections (VAT/ST is a state subject).

Another important thing to note here is that the practice of daily price revision - which started from June last year and which is being blamed for the current price flare up - brings little transparency to the mechanism used to determine prices of petrol and diesel.

A piece in The Hindu BusinessLine points out flawed movement of the trade price parity (weighted average of import parity price (IPP) and export parity price (EPP) with weights of 80 and 20 respectively of petrol). “Rather than showing the daily changes in the TPP and the rupee values, the oil companies are adjusting price differences in the daily prices charged to dealers. This gives the impression that the amount is going unfairly into the oil companies’ coffers,” the article says.

Put simply, this could mean there is enough leeway available with the government for some nudging to oil companies on pricing, even when the practice of daily price adjustments is continued. Perhaps the time has come to not only open up the pricing mechanism to scrutiny but also be sensitive to inflationary pressures being created by continuous rise in petrol, diesel prices.

(The author is a senior journalist. Views expressed are personal)

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| Edited by: Ahona Sengupta
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