Reportedly, the three public sector undertakings [PSUs] in the downstream oil segment viz. Indian Oil Corporation [IOCL], Hindustan Petroleum Corporation Limited [HPCL] and Bharat Petroleum Corporation Limited [BPCL] were directed not to give effect to hike in price of petrol and diesel by Rs 1 a liter each that had become necessary due to increase in the international price of these products.
The prices of these products were decontrolled, petrol in June 2010 and diesel in November 2014 and since then, the oil PSUs set their prices on the basis of movement in their international price [using import parity price and export parity price in the 90:10 ratio]. Whereas, up to May 31, 2017, these were revised fortnightly, from June 1, 2017 the revisions are being done on a daily basis.
In this backdrop, it is anomalous for the government to make an intervention. True, being the majority owner of these PSUs, it enjoys the necessary powers to give directions but that would be untenable as it goes against its own declared policy of letting the price be determined by a formula. For this very reason, the powers that be may have told the top brass verbally.
Whether the order is written or verbal does not matter. The key takeaway is even if the CEO of the PSU says that the decision not to hike price is its own, it would still be construed as coming from the government – its majority shareholder.
What prompted the government to intervene? Will it not set a bad precedent for the future? How will the PSUs be impacted? What is the way forward?
India depends on import for meeting 83% of its oil requirements. For 30 months at a stretch beginning mid 2014, due to steep decline in the international price of crude oil [from a peak of US$ 117 per barrel in June 2014, it had plummeted to a low of US$ 27 per barrel in January 2016] and corresponding reduction in the price of petrol and diesel, it was a honeymoon period for all three major stakeholders viz. government, consumers and oil PSUs.
While, consumers gained due to reduction in price by 25-30%, the center increased its revenue by hiking excise duty [ED]. Between November 2014 and January 2016, consequent to increases brought about in nine steps, ED on petrol went up from Rs 9.48 per liter to Rs 21.48 per liter or 2.26 times, whereas on diesel, the increase was even sharper from Rs 3.56 per liter to Rs 17.33 a liter – almost 5 times. As a result, the union government’s collection from ED more than doubled from Rs 99,000 crore in 2014-15 to Rs 242,000 crore in 2016-17.
The oil PSUs too added to their profitability. The post-tax profits of IOCL/BPCL/HPCL trebled from about Rs 11,200 crore during 2014-15 to Rs 37,600 crore during 2016-17. This was primarily due to increase in refinery margin resulting from lower cost of processing crude even as the fall in price of refined products viz. petrol and diesel was not proportionate.
After January, 2016, the crude moved up gradually to US$ 40 per barrel by December 2016. During 2017, the price continued its upward march and with the dawn of 2018, it is touching $70 a barrel mark. Even though, it is still significantly below the mid-2014 level [US$ 117 per barrel], the price of petrol and diesel has escalated to over Rs 74 per liter and Rs 65 per liter respectively which are breaching the mid-2014 level.
The overriding reason for this mis-alignment between crude price on one hand and petrol and diesel on the other is the high level of ED besides high VAT [27%/17%] charged by the states. The hike in ED did not prick when the crude price was low. Now, when the latter has increased, the former is hitting the consumer hard. In view of impending elections in a couple of states during this year followed by general elections in 2019, the ruling dispensation is therefore, keen to avoid further hike in prices.
At the same time, it cannot risk reduction in ED as this would lead to a steep reduction in revenue collection. Every rupee cut in ED means revenue loss of about Rs 13,000 crore annually.
At a time, when the government is facing huge liabilities from implementation of market assurance scheme [MAS] to ensure minimum support price [MSP] to farmers fixed at 1.5 times production cost, National Health Protection Scheme [this gives medical insurance cover @ Rs 500,000/- per person to 10 crore persons] and recapitalizing banks to tackle their NPAs [non-performing assets], any reduction in this major source of revenue would completely upset its fiscal arithmetic.
To expect oil PSUs to absorb the impact won’t be a prudent idea either. Such an action apart from being viewed as breach of good governance and erode investor confidence, has the potential of wiping out their profit. In turn, this will undermine their ability to implement expansion and modernization projects when the country needs more through put to meet growing demand.
Clearly, the government cannot escape reducing ED – an absolute must to offset the impact of increasing crude price on the consumers. At the same time, burdening oil PSUs is an abhorrent idea. In this catch-22 situation, the only logical course would be tap the full potential of GST for increasing tax collection.
At present, crude, petrol, diesel, natural gas and ATF [aviation turbine fuel] are not included under the GST dispensation as the states fear loss of revenue due to their inclusion. The fear is unfounded as under it, there will be buoyancy in collection even if the tax rate is kept low. This is primarily due to (i) hitherto unaccounted transactions coming under the tax net and (ii) boost to GDP due to elimination of cascading effect of tax-on-tax and reduction in logistics cost.
The GST Council – the all powerful body to consider changes in the tax structure, revision in tax rate, inclusion/exclusion etc – should therefore, consider inclusion of all oil and gas products under GST putting them under the 18% slab. This will provide big relief to consumers. Meanwhile, efforts such as electronic-way [e-way] bill and matching of sale and purchase transactions should be vigorously pursued to curb evasion.