During the last three weeks or so, the oil marketing public sector undertakings (PSUs) viz. Indian Oil Corporation Limited (IOCL), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL) have increased the retail price of petrol and diesel continuously almost every day. The cumulative increase works out to about Rs 9 per liter petrol and Rs 11 per liter in case of diesel. As a consequence, the current price of both the fuels in Delhi is about Rs 80.5 per liter. In April/May, petrol was selling at Rs 71 per liter whereas diesel price was Rs 69 per litre.
The prices of petrol and diesel are deregulated [petrol since June 2010 and diesel since October 2014]. The oil marketing PSUs are required to adjust their prices in sync with movement in their international prices. In April 2020, international price of crude had plummeted to a low of about US$ 20 per barrel; courtesy, glut in the global market caused by Covid – 19 – led widespread destruction of demand by about 29 million barrels per day (mbpd) even as the agreement between OPEC (Organization of Petroleum Exporting Countries) and non-OPEC suppliers on April 10, 2020 sought to cut supplies by only 10 mbpd.
In this backdrop and the international prices of petrol and diesel moving in tandem with the price of crude, one would have hoped for lowering of the price. Instead, we see a significant hike leading to consternation among stakeholders particularly, opposition parties and the common man. Coming as it is in the midst of economic slowdown, loss of income and jobs, the criticism is all the more strident.
How does one explain this anomalous situation? Have the oil marketing PSUs violated the underlying principle behind pricing of these fuels? Does it have something to do with taxes levied by the central government and the states?
On a close scrutiny of the facts, it turns out that the oil marketing PSUs have done nothing wrong. In fact, they have been going strictly by the prescribed formula which requires them to change the price on a daily basis linking the ex-refinery price to import parity price (IMPP) and export parity price (EPP) of respective fuels in the ratio of 80:20, the other components of retail price being freight charges and dealer commission plus taxes. Then, where did things go wrong?
When, the IMPP/EPP declined in tandem with decreasing international price, indeed there was corresponding decline in the ex-refinery price (ERP). But, the retail prices remained where they were. This was because both the Centre and states resorted to steep increase in the taxes thereby neutralizing the impact of lower ERP. The former has jacked up central excise duty (CED) in a brazen manner in two rounds, each orchestrated to take full advantage of global events.
In February/March, 2020, when the Covid – 19 monster was picking up momentum and OPEC and non-OPEC failed to reach an agreement on production cut, crude plunged to about US$ 30 per barrel (a steep drop of 50% from its January level]. On March 14, 2020, the central government hiked CED on petrol and diesel by Rs 3 per litre each to Rs 23 per litre and Rs 19 per litre respectively.
Meanwhile, realizing that a prolonged lockdown (needed to contain the virus) could take a heavy toll on economic activity and in turn, tax collection, it took Parliament’s nod for further increase in CED by up to Rs 8 per litre each on petrol and diesel – all of it via hike in Road and Infrastructure Cess (RaIC) – through amendment to Eighth Schedule of the Finance Act. In May, 2020, the government exercised this option by increasing CED on petrol by Rs 10 per litre and on diesel by Rs 13 per litre. Apart from increase in RaIC by Rs 8 per litre each, this included hike in special additional excise duty [SAED] viz. Rs 2 per litre on petrol and Rs 5 per litre on diesel. The states too increased VAT substantially; e.g. Delhi by as much as Rs 7 per litre.
Meanwhile, in view of crude price further going down to even below US$ 20 per barrel (late April/May), it was possible to absorb these hefty increases in taxes without having to increase the fuel price at the pump which remained at Rs 71 per liter and Rs 69 per litre for petrol and diesel respectively. However, during June, 2020, the crude price changed its trajectory and has started moving upward with Brent crude currently hovering around US$ 40 per barrel; for the Indian basket (mostly including supplies from middle-east) it is US$ 37 per barrel.
This has led to increase in IMPP/EPP of petrol and diesel and in turn, their ERP. The increase in prices at the pump during the last three weeks or so leading to the current level of about Rs 80.5 per liter each essentially captures the impact of the upward movement in the international price of crude.
The government could have prevented this hike by rolling back a portion of the increase in CED in the previous two rounds. But, faced with steep decline in tax revenue (this could be as high as Rs 400,000 crore) and ballooning expenditure commitments – including health as well as livelihood related – it is simply not willing to forego any revenue from this important source. For the same reason, states are unwilling to roll back the hike in VAT.
The Centre’s appetite for revenue is so intense that out of the proceeds from CED, it wants to keep a major chunk with itself. This may be seen from the fact that out of the current CED on petrol Rs 33 per litre, Rs 18 per liter is from RaIC whereas in case of diesel, out of Rs 32 per litre, RaIC is Rs 12 per liter. Under the scheme of devolution of central taxes with states – as per recommendations of the Finance Commission – the Centre can retain all of the proceeds from the Cess. That is why, in last two rounds (March and May, 2020), it garnered bulk of the hike in CED from increase in RaIC.
We face a bizarre situation whereby, despite the international price of crude being at low of just about US$ 37 per barrel, the price of both petrol and diesel at the pump is above Rs 80 per liter. Of this, taxes alone account for about 2/3rd. This could go up if crude price further moves northward (the price hitting Rs 100/- mark is not ruled out). But, it imposes prohibitive cost on the economy.
The high fuel price contributes to high inflation, higher cost fertilizers and food (mainly via increasing cost transportation), irrigation (due to higher fuel cost for running pumps) etc. A good part of extra revenue will be offset by higher subsidy on these items – a typical case of taking from one hand and giving back from the other. Besides, it undermines efforts to increase farmer’s income due to higher fuel expense on running the pump-sets.
The cost of fuel is a major component of operational cost of any firm including micro, small and medium enterprises (MSMEs). It is ironic that on one hand, the government is making all out efforts [moratorium on loan repayment, additional working capital, lower interest rate etc] to ensure that they come out of the crisis, on the other, it increases their cost of operations [courtesy, steep hike in CED].
The high taxes are also a major bottleneck in the way of removing the current tag of ‘zero rating’ under GST (Goods and Services Tax) which is a jargon to continue petrol, diesel (besides natural gas, crude and aviation turbine fuel or ATF) under the erstwhile regime of CED, VAT and other local taxes. Even if, these were to be put under the highest tax slab under GST, the applicable rate will be 28%. Against this, the current incidence of tax under CED/VAT being more than double the cost of supply, the Centre and states will shudder at the very idea of including these products under the GST dispensation.
Even so, it is imprudent for the government to become too much dependent on oil taxes for increasing its revenue and maintaining fiscal balance. 2020-21 being an excruciating year (courtesy, Covid -19), while, it may continue with high taxes for now, but from next year, the hikes affected in March/May, 2020 should be rolled back. Thereafter, it should implement a calibrated action plan to reduce CED to reasonable rates preferably to a level less than Rs 10 per liter. The states should follow suit.