India's tryst with fuel prices has been an unending quest for lower deficits over decades. Now, prices are going up - but somehow, they seem to be rising a lot more in India than in other countries.
Crude oil has reached beyond $80/bbl in recent days, retailing at Rs 82.38/litre in Delhi and Rs 87.84/litre in Mumbai as of October 19. In comparison, petrol prices have reached Rs 82.30/litre in Australia, Rs 72.75 in Sri Lanka and Rs 61.72 in some parts of the US. This spike has been due to a variety of factors including cuts in oil production, sanctions on Iran oil imports by the US and volatility in the rupee. A $10/bbl increase in oil prices can reduce India's GDP by 0.2-0.3%, while increasing WPI inflation by 1.7% and worsening the current account deficit by $9-10 bn (Economic Survey, 2018). Expensive crude oil also means costly imports, thereby putting additional downward pressure on the rupee (as witnessed in the rupee's recent slide).
However, this oil price increase has also partially been driven by a historical policy of the Indian government to treat oil and gas products as a cash cow. India has a host of taxes on petrol and diesel - the centre levies an excise duty, while local state governments levy VAT (usually above 20% for most states); retail price breakdown of fuel prices reveals that taxes constitute 43% and 33% of the retail price of petrol and diesel respectively (in Delhi, as of October 15 at IOCL pumps). Such taxes can increase the price of petrol by 90% over the dealer price (including dealer commissions), and that of diesel by 60%. In recent years (2015-2017), excise revenue comprised 23% of total tax revenue (including the share of states) of the centre; of this, excise revenue gained from taxing petrol and diesel was worth ~80-90% (Parikh, S, Singh, P.K, 2017). Over the last few decades, even when crude prices have fallen to historical lows, both the centre and state have provided little, if any, relief, typically asking the oil marketing companies to absorb the burden of increased prices.
Further examination of these taxes also highlights that the VAT charged by state governments has an element of double-taxation, and as such is calculated on sum of price charged to dealer, dealer commission and excise duty, a tax already collected by the centre. Changing this double taxation could reduce the petrol prices by Rs 5/litre instantly, albeit at the cost of hitting state revenues. Given the ad-valorem nature of state VAT taxes, state governments typically collect more revenue than usually budgeted - thus, the state government has headroom to cut VAT rates provided other factors remain the same. State governments could also consider a fixed tax rate which is in-line with their budgets. In addition, dealer commissions have risen significantly over the last two decades, rising from Rs 707/KL in 2004 to Rs 2,674 + 0.859% of product billable price in August 2017 for petrol (PPAC). Instead of asking refineries to subsidize fuel prices, the government should consider rationalizing the tax regime for petrol and diesel prices. For now, the government can consider utilizing inventory stocks at state refineries (typically 7-8 days of inventory), along with stocks in pipelines, ships in transit and the strategic petroleum reserve to provide immediate albeit short-term relief to the consumer.
Historically, the Indian government also sought to promote diesel at the expense of petrol; this has had implications coming home to roost now. Indian grades of diesel typically have higher particulate matter and other pollutants compared to petrol, leading to carcinogenic emissions. In addition, given the high demand for diesel, refining to produce extra diesel requires the usage of hydrocracking by Indian refineries, increasing the overall refining cost. Promotion of alternate fuels matters - recent moves by the government to push for biodiesel - are particularly welcome. We should create a stable regulatory regime for the growth of electric vehicles, improving our manufacturing competitiveness, reducing our dependence on oil and insulating us from future price increases. The push for creating more efficient public transport, including metro railways, would also have a mitigating impact.
We must think about this problem from a long-term view as well. While India isn't ideal geography for crude production, we should seek to explore and raise production from our sedimentary basins wherever possible. Crude oil production has dipped from 37.8 million MT in 2013-14 to 35.7 million MT in 2017-18, while consumption has increased from 158.4 million MT to 204.9 million MT, taking our import dependency from 77.3% in 2013-14 to 82.8% in 2017-18 (PPAC). Substituting imported crude oil with indigenous crude oil has two major benefits - lesser imports mean lesser downward pressure on the rupee, while increased domestic crude oil production would mean additional government revenue through royalty, cess, profit petroleum and income tax, besides additional job creation and increased investments. While the government's steps to pursue ad hoc deals with oil suppliers to reduce prices and trade in rupees should be encouraged, we should seek to increase indigenous production of oil. A stable policy regime (as witnessed in the recent DSF and OALP bidding rounds), efficient contract management and timely approvals, could attract further global interest and capital for India's upstream sector.
Rising fuel prices have a cascading impact on the economy, raising inputs costs associated with logistics, and eventually increasing the price of essential goods. Higher fuel prices lead to rising inflation and impact the common man on a daily basis as the cost of transportation goes up. Arguably, the input costs associated with marginal agriculture have risen over the last few years as oil prices have increased. India's long-term economic health requires a significant rethink on our current dependence on oil and gas, a shift to electric vehicles and solar-based electricity would go a long way in rebalancing our economy. We need to reconsider our increasingly car-driven economic system and pursue a whole-hearted shift towards mass public transportation. Without this, we will continue in our decadal cycle of pursuing ad hoc discount deals from oil-producing nations.
(Feroze Varun Gandhi is a member of the BJP and a two-time member of parliament.)
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