The pricing mechanism in India, which is based on the international price of petrol, is a major reason for the rising fuel prices, alongside the increase in the price of crude oil and the falling rupee.
THE RISING RETAIL PRICES OF PETROL AND diesel ought to worry the Bharatiya Janata Party (Bjp)led National Democratic Alliance (NDA) government at the Centre as they can well become a political issue in an election year. The current prices, the highest in recent times, have had a cascading effect on food products, with consumers paying astronomical amounts for daily consumables such as vegetables. The high prices are also expected to inflate India’s current account deficit. With crude oil touching $80 a barrel in the global market, domestic oil prices of petrol and petroleum products have reached unaffordable levels. In several cities, the retail price of petrol is well over Rs.80; for instance, in Mumbai it was as high as Rs.89.69 on September 22. The fall in crude oil production and the sanctions imposed by the United States on Iranian imports are among factors causing the rise in oil prices, though there is reason to believe that the Indian pricing mechanism itself is responsible for the high fuel prices in the country.
Some State governments have attempted to reduce taxes to bring consumers some relief, but it has not been enough. Tapan Sen, general secretary of the Centre of Indian Trade Unions (CITU), explained to Frontline that as far as global crude oil production was concerned it was a conscious decision to produce or not to produce. If prices tended to collapse, oil production would automatically be reduced. This ensured the maintenance of a demand-supply equilibrium. In the Indian context, it was clear that the day-to-day adjustment of fuel prices was done not only because of the volatility of international prices and production. Since 2013, a downward trend in fuel prices had been observed, but the benefit, Sen said, was never passed on to the people. It was neutralised by a higher incidence of taxation, at both the Central and State levels.
Indirect taxation is one of the single biggest sources of revenue for both the Central and State governments, with the tax on fuel representing around 50 per cent of the indirect tax revenue for both. The State and Central governments’ dependence on this was responsible for the high fuel rates, said Sen. When the fuel prices were falling, the people could have got relief , but this did not happen.
The basis of pricing of fuel was another factor. Earlier
it was a cost-based pricing system on the basis of which an administered pricing mechanism (APM) was in place.
Sen told Frontline that in response to a question in Parliament regarding the basis of the administered price for diesel, as it was at a higher level, the government had said that the cost was high as there was a major dependence on imports and that the basis for calculating the administered price was the total of import cost of crude plus refining costs plus transportation costs plus a reasonable return. But the entire pricing regime was changed from that mechanism. Henceforth, petroleum pricing was to be in line with the price of petrol in the international market. “We were not importing petrol but crude. So why should our pricing be determined by the price of petrol in the international market? We said, add your refining costs plus transport costs and arrive at a basic
A PROTEST by the Janata Dal (Secular) in Bengaluru during the Bharath Bandh on September 10 against the Union government for increasing fuel prices.