Oily Mess

A sharp increase in global crude oil prices has pushed retail rates of petrol and diesel to historic highs. Taxes are partly to be blamed, but reducing excise duties may not be easy for a cash-strapped government

On January 19, Minister for Petroleum and Natural Gas Dharmendra Pradhan came down heavily on oil-producing countries for going slow in ramping up supplies and artificially inflating global crude prices. "A few months back we were discussing about consumption-centric economic revival, demand revival, and we are supposed to restrict our production cuts and gradually ramp up production by January - but in contradiction to that, we are now controlling oil production," Pradhan said at an energy conference organised by the Atlantic Council. India is the third-largest consumer of energy in the world and imports 85 per cent of its crude requirement every year. Prices of the Indian crude basket have gone up from $40.66 per barrel in October to a shade under $70 per barrel today, a rise of nearly 68 per cent within six months. High oil prices have a debilitating impact on the country's fiscal maths.

Petrol Hits A Century

Retail prices of petrol and diesel have mirrored the trend. Since October, petrol and diesel prices have gone up by over Rs 10 per litre in Delhi and are at their all-time highs. It is much worse in other parts. In mid-February, petrol prices crossed the psychological Rs 100-per-litre mark in Rajasthan's Sriganganagar district. Since then, the barrier has been breached in over two dozen districts - mostly in the states of Rajasthan and Madhya Pradesh. Even in Mumbai, a litre of petrol costs a high Rs 97.19 (as on March 25).

At a time when the revival in the domestic economy is just beginning to gather steam, this has come as a vicious curveball, alienating consumers and pushing the government in a huddle. "Due to an increase in prices of crude oil in international markets, consumer price (for petrol and diesel) has risen. This will soften gradually. Global supply was reduced due to Covid, affecting production as well," Pradhan had said during another event on March 13. "We are in talks with oil-producing countries to reduce prices."

Putting the blame for high prices of the two fuels at the pump entirely on the vagaries of the international market is, however, only one side of the story. The government cant slap the blame for the other. In July 2008, global crude prices hit a record high of $132.47 per barrel, but domestic prices, which were subsidised and regulated at that time, were much lower at Rs 50.62 per litre for petrol and Rs 34.86 per litre for diesel. Then again in March 2012, crude prices hit $123.61 per barrel but a litre of petrol, which wasn't subsidised then was Rs 65.64, while diesel, which was still regulated, was priced at Rs 40.91. The discrepancy in pricing between then and now is due to a steep increase in taxes. In the case of petrol, excise duties that go to the central exchequer and value-added taxes (VAT) that go to the state government, together account for Rs 54.58, or over 59 per cent, of the retail price in Delhi. For diesel the figure is Rs 43.74, or 53.7 per cent.

Milking The Oil

Over the last few years, the government has increased taxes on fuel to offset revenue losses from other sources. Between FY15 and FY20, excise duties were raised a record 12 times and lowered only twice. In effect, excise duty on petrol and diesel since April 2014 till today has gone up by Rs 23.42 per litre - an increase of 247 per cent, and Rs 27.3 per litre - an increase of 607 per cent. Similarly, VAT has also gone up by Rs 9.14 per litre on petrol and Rs 5.33 per litre on diesel, an increase of 77 and 80.6 per cent, respectively.

At the same time, diesel prices were deregulated in October 2014 (for petrol it was done in 2010 itself), which resulted in a steep decline in under-recovery and subsidy burden that the government had to bear on oil - from a high Rs 264,387 crore in 2012/13 to just Rs 26,621 crore in 2019/20, a 90 per cent decline. The contribution of the sector to the coffers of the Central and state governments through excise duties and VAT - which is ad valorem so increases with the overall rise in prices - has ballooned during the same period from Rs 278,661 crore to Rs 555,371 crore, a growth of 99.3 per cent. For everybody, low oil prices are a bonanza.

So early on in FY21, as the country went into a lockdown bringing all economic activity to a halt, the government once again turned to oil to shore up its revenues. Global crude prices turned negative for the first time ever in the US in April 2020. The price of the Indian basket declined to a low of just $19.9 per barrel. Consumers in India, locked in their homes, however, never got the benefit of such rock-bottom prices. On May 5, duties on petrol were hiked by Rs 10 per litre and on diesel by Rs 13 per litre. It was the steepest-ever hike in one go in transport fuel in India.

"Earnings of the Centre and states were negligible during the lockdown. We have allocated large chunks to various sectors in the Budget to increase jobs," Pradhan had said March 13. "They need some resources... (and) this (taxing petrol and diesel) has been a proven and substantial route by all governments, whether states or the Centre."

It shows up in the fiscal report card for 2020/21 as well. Excise duty revenues jumped over 35 per cent to Rs 3,61,000 crore in 2020/21, against the budgeted estimate of Rs 2,67,000 crore. Part of this was collected through cess under the Central Road and Infrastructure Fund (CRIF), which the Centre does not need to share with states. In fiscal 2021, the Centre had estimated it would pocket Rs 2,31,132 crore, 83.3 per cent higher than its own own budgetary estimate of Rs 1,26,076 crore, which it had presented in February last year. There was no spectre of coronavirus at that time. For the sake of comparison, in 2019/20, the government had collected a relatively modest Rs 90,252 crore under the CRIF.

Clamour For A Cut

The government's expectations from taxes on oil for the next year raise some hope of a potential cut in inflated duties. For 2021/22, the government has budgeted an excise revenue of Rs 3,35,000 crore, an over 25 per cent rise over 2020/21, but 7.8 per cent lower than revised estimates.

"This is a vexatious issue in which no answer other than price cut will be able to please the public," Finance Minister Nirmala Sitharaman had said on February 20. "It is a question which I would like states and the Centre to talk about because its not just the Centre which has duties on petroleum products, it also has the states charging. So, there is an issue which is layered and as a result that has to be a matter ideally for the Centre and the states to talk about."

Officially, the government has said there is no proposal to either reduce excise duties on petrol and diesel or to include them under the Goods and Services Tax (GST). While participating in a discussion on the Finance Bill 2021 in the Rajya Sabha on March 24, BJP leader Sushil Kumar Modi had said it was not possible to bring petrol and diesel under GST for the next eight to 10 years as it would cause an annual revenue loss of Rs 2 lakh crore to all states.

However, according to the EcoWrap report authored by Soumya Kanti Ghosh, Group Chief Economic Advisor, SBI, the move could potentially bring down prices to Rs 75 per litre for petrol and Rs 68 per litre for diesel. It presumes oil to be taxed at the highest GST slab of 28 per cent, with an additional Rs 30 per litre cess on petrol and Rs 20 per litre on diesel. "When we use this tax structure for fiscal 2022, when Central and states taxes are already so high, we see that states, which have the highest rates, are losing revenue if they shift to this GST regime. But this flat taxation structure brings in uniformity and as per our calculations, it brings down the burden of taxes on the common man by almost Rs 10-30 depending on the product consumed and the state in which it is consumed. Additionally, it benefits some states which do not drastically tax their petroleum products, like Uttar Pradesh," the report states.

The demand for bringing petroleum products under GST isn't new. In 2017 when crude prices had risen, Pradhan had made a pitch for it, which never materialised due to a lack of consensus among states. It is no different right now either. Under the GST regime, states have given up most of their powers of taxation except oil, liquor and electricity, and most remain steadfast on not giving up on these. Some even blame the Centre for not honouring its end of the bargain that has resulted in a shortfall in their respective balance-sheets. According to estimates, the Centre owes over Rs 2 lakh crore to states as dues under GST.

"The Centre is already indebted to us, they are in no position to ask us to give them the right to put a tax on oil as well," says a state finance minister. "Oil and liquor are the only avenues left to us. Had the finance minister kept her end of the bargain as per GST, we would have perhaps considered (GST on oil). Today, when we ourselves are so constrained for revenues, we can't give up whatever is left to us."

The minister also adds that VAT goes up not only at the discretion of state governments, but whenever oil marketing companies raise prices. So does their share in excise duties, but the decision on both is taken by the Centre. "To pin the blame on us is not right. Also, note how the Central government has steadily increased cess including in this year's budget, so they do not have to share it with states. They have unilaterally used every rule in the book to squeeze oil for revenue and now want us to share the blame for it."

The Side-Effects

Experts believe extraordinarily high retail fuel prices can be a body blow to the nascent economic revival story. Higher fuel consumption is seen as a sign of robust industrial activity and the initial signs are ominous. In January, fuel consumption in the country declined by 3.9 per cent, the first time in five months. In February it fell again, this time by 4.9 per cent to 17.2 million tonnes compared to last year.

"There is anger among consumers due to high oil prices. They think petrol pump owners are gaining from it, which is not true," says Ajay Bansal, National President, All India Petroleum Dealers Association. "Taxes on petrol and diesel are so high now that petrol pump attendants have become like tax collectors. The government gets more money from the sale of oil than oil producers or sellers. But we are the ones consumers see when they need to refuel."

So far, the Centre has dithered over cutting excise duties or cess even as some states, especially those set for elections, have reduced VAT. The biggest cut in VAT rates was in Meghalaya in the North East, from 31.62 to 20 per cent on petrol and from 22.95 to 12 per cent on diesel, bringing prices down by Rs 7.4 and Rs 7.1 per litre, respectively. Similarly, governments in poll-bound states of West Bengal and Assam have cut taxes by Rs 1 and Rs 5, respectively.

"Fuel prices are way too high in the country right now and ideally it should be rangebound between Rs 60-70 per litre," says Preetam Mohan Singh, Senior Vice president, Praxis Global Alliance. "We have a strong government at the Centre which also rules so many states. Perhaps, it can send a message by reducing taxes in its own states, putting pressure on other states that have Opposition parties in power."

In its report submitted to Parliament on March 19, the Parliamentary Panel on Food and Consumer Affairs also recommended a reduction in taxes. "The committee is of the opinion that taxes levied on petroleum products especially on petrol and diesel are on the higher side and need a revision after making an evaluation of the prevailing pricing regime in the country and also making a comparative assessment of the same with systems prevailing in other countries," the report states.

Robust GST collections in the last few months have also given credence to the theory that the government may now have some elbow-room to go easy on taxes on fuel. GST collections hit an all-time monthly high of Rs 1.19 lakh crore in January. Including February, collections have been over Rs 1-lakh-crore mark for five straight months and Rs 1.1 lakh crore for three straight months.

Officials in the oil ministry, however, advise caution. "Oil prices are expected to be very volatile this year so we will be watchful. Cutting taxes to provide relief to consumers only for prices to go up again due to increase in international crude prices would not make any sense," according to an official in the oil ministry. "The demand for a cut is valid but there are many other important considerations as well. The economy is still not out of the woods yet."

The one industry that will get impacted directly is the domestic automobile sector. Consumers tend to look at the cost of running of a car while making purchasing decisions and tend to delay them when fuel prices are high.

"Somebody needs to research on how high retail prices of fuel impacts new car or two-wheeler buyers," says R.C. Bhargava, Chairman, Maruti Suzuki. "We are seeing a definite uptick in demand for CNG vehicles so that is probably one of the fallouts."

"If prices are as high as they are now for a short period then it may not have an impact on sales, but otherwise it will act as a dampener in the long term," says Naveen Soni, Senior Vice president, Toyota Kirloskar Motor.

It may have an even bigger impact on the domestic two-wheeler industry where commuter bikes and scooters form the biggest segment. Some of it is already visible. After registering sales of over 2 million units in October last year, sales dropped to around 1.4 million units in February.

"Though a direct correlation cannot be established between the increase in gasoline prices and that of two-wheelers sales in the short term, in the long run, rise in fuel prices could impact purchasing decisions of two-wheeler buyers," says Rajesh Menon, Director-General, Society of Indian Automobile Manufacturers (SIAM).

What also doesn't help matters is the lack of transparency in the fuel-pricing mechanism. After both fuels were deregulated, oil marketing companies started revising prices on a daily basis since June 2017. The idea was to pass on the burden or benefit of high or low global prices directly to consumers without any delay. Yet on many occasions in the past, prices have inexplicably been frozen whenever elections in any major state has been around. In April-May 2018 for example, prices stayed frozen for 19 days on the trot in the run-up to Karnataka state elections on May 12.

"Daily price revision is a sham," says a senior official in a state-run oil marketing firm. "If that were the case, prices wouldn't remain static for even one day. It is still entirely controlled by the government, which has gamed the system very efficiently to squeeze more revenue out of oil."

With elections in five states, including West Bengal, Assam and Tamil Nadu, in the offing, prices have again frozen since February 28. Consumers in at least 30 districts in Rajasthan and Madhya Pradesh are still paying more than Rs 100 per litre for petrol. The next round of elections in the two states is only in 2023.

As daily price revision shows, a cut here or a freeze there may not mean much. The consumer cannot do without oil and the government cannot help but milk it for taxes.