Faced with skyrocketing prices of petrol and diesel (in some states such as Rajasthan, petrol has hit the psychological Rs 100 per litre mark) even as the Prime Minister, Narendra Modi has lamented at the erstwhile UPA – regime for not doing enough to increase domestic production (currently, India imports nearly 85% of its crude oil consumption) making India perennially vulnerable to rising international price, the minister for petroleum and natural gas, Dharmendra Pradhan has urged oil exporting countries to exercise restrain while fixing the price of crude oil. The arguments of both are not convincing.
Pricing of oil products being linked to international price (even domestic refineries are paid for their supplies on this basis), even if the share of indigenous production were to increase from current 15% to say 50%, Indian consumers would still be paying what they pay today. Even if the extant system of ‘linkage with international price’ were to be abandoned and oil companies allowed to price the products based on market forces, then also, considering that domestic supply is far short of demand, it is unlikely that they would charge any less.
As regards, Pradhan’s request, exporters don’t listen to what leaders of importing countries want; while fixing the price, they go fundamentally by the global demand-supply balance and don’t even look at their cost of production. When, the balance is tight, the price increases sharply. For instance, in 2008, when demand increased exponentially (courtesy, pump-priming by developed countries in the wake of the Lehman financial crisis besides major boosters from China and India), crude touched a record high of US$150 per barrel. In 2014, it touched another peak of US$117 per barrel.
At another extreme, in 1997 when there was large-scale destruction of demand (due to the Asian financial crisis), the price plummeted to as low as US$10 per barrel. In recent times, during 2016, the price touched another low of US$26 per barrel. In April 2020, due to Covid–19 induced annihilation of demand from all over the globe, the price plunged to a low of about $20 per barrel; that was despite an agreement by OPEC (Organisation of Petroleum Exporting Countries) to cut supplies by 10 million barrels per day (mbpd). Thereafter, the price has been rising in sync with revival of demand (thanks to world-wide resumption of economic activity consequent to diminishing impact of the pandemic and vaccination gathering pace) even as OPEC continues with its planned cut in production. Currently, the price is hovering around US$70 per barrel.
In short, the exporters won’t reduce the price on our asking and will only go by the evolving demand-supply dynamics. However, India may be able to influence the price – that too in the medium to long-term – if only we intensify our efforts on multiple fronts.
These include among others (i) increasing the percentage of ethanol in fuel mix even beyond 10% (sugarcane farmers offer huge potential in terms of increasing its availability); (ii) reducing consumption of diesel by farmers by accelerating the pace of solar-based power supply for running irrigation pumps; (iii) electrification of railways (it has plans to power trains with electricity drawn from solar-based plants to be set up along tracks); (iv) pursuit of conservation efforts across all sectors viz. industries, services, infrastructure; (v) implementing measures including making the policy and regulatory environment conducive for increasing domestic production of crude and gas. But, this can help only up to a point in lowering the retail price to consumers which has a very high component of taxes.
To get a sense, let us look at some numbers. The pump price is arrived at by adding four components, viz. the ex-refinery price (ERP), freight charges, dealer commission and taxes. The ERP in turn is linked to the import parity price (IMPP) and export parity price (EPP) of respective fuels in the ratio of 80:20. In Delhi, the price of Rs 89.29 per liter (as on Feb 16) includes ERP plus freight: Rs 32.1; CED: Rs 32.9; dealer commission: Rs 3.68; VAT: Rs 20.61.
The tax component alone being Rs 53.51 per liter (CED:32.9 plus VAT:20.61), even if ERP plus freight goes down to Rs 22 per liter (the level that existed in June 2020 when international crude price was US$ 40 per barrel – as against current of close to US$ 70 per barrel), the pump price would still be a high of Rs 79.29 per liter. Therefore, an argument that the fuel prices are beyond Government’s control is untenable.
Out of the CED i.e. about Rs 33 per litre collected by the Centre, Rs 18 per litre comes from the Road and Infrastructure Cess (RaIC) which is entirely retained by it. Of the balance Rs 15 per liter, it retains 59% or Rs 9 per liter (after giving 41% to states under 15th Finance Commission devolution formula). On a net basis thus, the Centre gets Rs 27 per liter while almost an equivalent amount Rs 26.6 per liter goes to the state. Therefore, both the Centre and state governments are equally responsible for contributing to high fuel price.
The Finance Minister (FM), Nirmala Sitharaman has opined that bringing these products (besides crude, natural gas and ATF) under Goods and Services Tax (GST) can help in reducing the tax burden. Several states those ruled by opposition parties also want this to happen sooner than later. But, it is easier said than done.
The constitutional amendment Act on GST provided for inclusion of these products but the purpose was defeated by branding them as ‘zero-rated’ – a glamorous nomenclature for continuing them under pre-GST regime. This was prompted by the fear of revenue loss. But, the GST Compensation Act, 2017 – along with an amendment to this Act garner resources by levying cess on goods falling in the highest 28% slab to fund compensation to the states for the loss of revenue – was meant precisely to address this concern. Yet, the decision to keep these products outside GST in the first place defies logic.
Replying to a question on a TV channel (July 1, 2017), the then FM and chairman, GST Council, Arun Jaitely had said ‘he was personally not in favor of excluding the aforementioned products’. Yet, the Central Government and states decided to exclude them and the position continues till date.
Now, following spike in oil prices, both the Centre and states feel that now is the time to bring them under GST. They don’t realize what they are up to. Even if, the Council decides to put them in the highest tax slab (by any stretch of imagination, oil and gas products can’t be termed as demerit; so placing them in 18%/12% slab would be more realistic), the tax rate on petrol will be 28% (or even less at 18%/12% if these are put in any of these slabs). Against this, the current tax rate is a whopping 167% (53.51/32.1×100)!
At present, the Centre collects over 20% of its indirect tax revenue (ITR) from CED on petrol and diesel. States too get about 20% of their ITR from VAT and other taxes on these fuels. In this backdrop, they will shudder at the very thought of reducing tax to a mere 1/6th/1/9th/1/14th of what they are collecting today.
The message is loud and clear. For lowering the burden of fuel taxes, the Centre and states need to put their heads to see how tax revenue from other sources can be boosted (there is huge untapped potential including ‘taxes evaded’). If, they don’t do, there is no escape from consumers having to pay high fuel prices.