In the wake of widespread destruction of demand triggered by Covid – 19, the international price of crude has plummeted to a low of about US$ 20 per barrel despite a historic agreement between OPEC and non-OPEC suppliers on April 10, 2020 to cut production by 10 million barrels per day [mbpd] – as demand destruction [about 29 mbpd] far exceeds the cut in supply resulting a huge glut.
De jure, the prices of petrol and diesel are deregulated [this was done: petrol in June 2010 and diesel in October 2014]. The oil marketing companies are expected to adjust the price in line with movement in their international price. Now, that the international price of crude has declined [albeit steeply], as per the formula, the price of petrol and diesel should have gone down. But, that was not to be.
The prices remain where they were. For instance, in Delhi the price of diesel at the pump is Rs 69 per litre and that of petrol Rs 71 per litre. This is because both the Centre and states have increased taxes on these products steeply. This is not unexpected as in the past also, Modi – government had mopped up a major slice of oil price cut. Let us take a look at the trends.
From a peak of US$ 117 per barrel in November 2014, the crude price plunged to US$ 28 per barrel in January 2016. Seeing a huge opportunity in this, it increased the central excise duty [CED] on petrol from Rs 9.8 per litre to Rs 21.5 per litre and on diesel from Rs 3.8 per litre to Rs 17.3 per litre [the hike was given effect to in as many as 9 installments]. From this bottom, crude moved up gradually to touch a little over US$ 40 per barrel by year end.
During 2017 however, the pace of increase accelerated to touch US$ 60 per barrel in October 2017 leading to corresponding increase in the price of fuels. Amidst opposition, the government was forced to cut CED by Rs 2 per litre each on petrol and diesel to Rs 19.5 per litre and Rs 15.3 per litre respectively. During 2018, crude further moved up to US$ 80 per barrel in October, 2018 prompting yet another cut in duty to Rs 18 per litre on petrol and to Rs 14 per litre on diesel.
In 2019, crude price commenced its downward journey. By the year end, it had slid to around US$ 60 per barrel. Leveraging this, in the union budget for 2019-20, the finance minister, Nirmala Sitharaman raised CED by Rs 2 per litre each Rs 20 per litre on petrol and Rs 16 per litre on diesel. In early 2020, crude plunged to about US$ 30 per barrel [a steep drop of about 50% was due to failure of OPEC and non-OPEC to reach an a deal on production cut]. On March 14, 2020, the government yet again hiked CED on petrol and diesel by Rs 3 per litre each to Rs 23 per litre and Rs 19 per litre respectively.
An important point to note here is that CED of Rs 23 per litre on petrol includes Rs 10 per litre towards Road and Infrastructure Cess [RaIC]. In case of diesel, the RaIC component was Rs 4 per litre. Under the formula for sharing of central taxes with states [as per the Finance Commission award], the collection from RaIC is excluded implying that the latter is retained entirely by the Centre.
Meanwhile, staring at a steep decline in the tax revenue during 2020-21 in the wake of nation-wide lockdown announced on March 24, 2020 [the lockdown was needed to contain community transmission of Corona], the government took Parliament’s nod for further increase in CED by up to Rs 8 per litre each – vide hike in RaIC – any time it wishes through amendment to Eighth Schedule of the Finance Act.
In view of the lockdown being continued longer than initially thought, dampening effect on economic activity and in turn, revenue loss, it has exercised the option by increasing CED on petrol by a whopping Rs 10 per litre and on diesel by Rs 13 per litre. This includes increase in RaIC by Rs 8 per litre each and remaining via hike in special additional excise duty [SAED] viz. Rs 2 per litre on petrol and Rs 5 per litre on diesel. The current CED on petrol is Rs 33 per litre including Rs 18 per litre as cess whereas on diesel, it is Rs 32 per litre which includes Rs 12 per litre towards RaIC.
Not to be left behind, the states have also increased VAT [value added tax] substantially; for instance Delhi by as much as Rs 7 per litre. This has led to a bizarre situation whereby, the tax component alone is about 70% of the price at pump.
The sole motive behind steep increase in excise duty on petrol and diesel by the Centre is to garner revenue to offset the loss caused due to Covid – 19. It is expected to gain about Rs 100,000 – 160,000 crore depending on the severity of decline in consumption [this is projected to be in the range of 10-20% during 2020-21]. This may be of some help but is far from plugging the huge gap the government faces in meeting ballooning expenditure commitments in the face of steep decline in revenue. But, it imposes prohibitive cost on the economy.
The high fuel price [even when crude price is hovering around US$ 20 per barrel] 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].
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 Centre has taken away an overwhelming share of the excise duty hike in the form of RaIC; 80% petrol and 60% diesel primarily to keep a major chunk of the extra revenue with itself. The states are well aware of this; so they have gone ahead hiking their own taxes [this could have been avoided if only the Centre had increased SAED only which is shared with states]. In the process, consumers are facing double whammy.
Today, the crude price is low and will remain low for some time. But, after things get back to normal and it starts moving up, the prices of petrol and diesel at the pump could break the back of consumers and make industries and businesses in particular, MSMEs unviable. True, the excise duty/road cess could then be reduced; but once the government gets used to higher revenue and maintaining fiscal balance becomes too much dependent on oil taxes, it won’t be easy to implement that option.
It is clear that in the overall scheme of pricing, consumer gets the least priority; this may also be seen from government’s stance on pricing of domestic gas another important fuel which is used in the manufacture of fertilizers and power. At present, the price of gas is bench-marked to its price at 4 international locations [as per October 2014 guidelines]. The price of gas in turn, is linked to the international price of crude. Since, the price of latter is on the downswing, that of former gas also gone down.
But, the minister for petroleum and natural gas, Dharmendra Pradhan does not seem to be happy with this development. Expressing concern that this could affect return to the producers of gas on their investment, he has alluded to bringing about a change in the methodology of pricing domestic gas. If, that happens, it will be detrimental to the interests of consumers.
The government needs to take a reasonable stance. Instead of being overawed by revenue and protecting interests of producers, it should strike a judicious balance with an equally important objective of keeping fuel price affordable to consumers.