FUELLING THE I NFLATION FI RE
The spike in fuel prices has the Narendra Modi government backed into a corner once again. Prices of diesel have touched an all-time high, while petrol prices are at their highest level in four years. On Monday, April 2, diesel was sold at Rs 64.69 a litre in Delhi and 68.89 in Mumbai, while petrol was sold at Rs 73.83 in Delhi and Rs 81.69 in Mumbai.
Apart from taxing consumers, high oil prices will have a negative impact on the economy as India is a big oil importer. High prices will also lead to inflation, leaving little room for the central bank to cut rates. The 47 per cent increase in crude oil prices since July 1 last year has expanded India’s oil import bill to $88 billion (Rs 5.7 lakh crore) in 2017-18, from $70 billion (Rs 4.6 lakh crore) in the previous year. India imports nearly 82 per cent of its oil requirement from countries such as Saudi Arabia, Iran, Iraq, Nigeria, Venezuela and the UAE. State-owned refiners Indian Oil, Bharat Petroleum and Hindustan Petroleum control about 92 per cent of the fuel market.
The immediate cause for the spike in India is the rising global crude oil prices, spurred by brewing geopolitical tensions in West Asia ahead of the May 12 deadline by when US President Donald Trump has to sign on a presidential waiver of sanctions on Iran. If he does not do so, he will be violating a landmark multilateral agreement on the future of Iran’s nuclear programme signed in 2015 with European allies, Russia, China and Iran. Trump has threatened to pull out of the nuclear accord and wants the European signatories to “fix the terrible flaws” of the deal.
This apart, production cuts led by the Organisation of the Petroleum Exporting Countries (OPEC) and Russia, which started in 2017 and are due to run till end-2018, have also led to oil rising from a multi-year low of nearly $27 a barrel in January 2016 to around $70 at present.
In June 2017, the government introduced dynamic pricing for retail petroleum products, under which fuel prices change on a daily basis instead of fortnightly, as in the earlier dispensation. Dynamic pricing was introduced as a natural progression of India’s shift towards deregulated fuel prices. Petrol prices were first deregulated in 2010 (and diesel in 2014), though the rates were revised only on a fortnightly basis. Introducing dynamic pricing at a time when crude prices were trading at $45 a barrel in the global market looked well-timed then, but with the new surge in prices, consumers have begun to feel the heat. Incidentally, India has the highest retail prices of petrol and diesel among South Asian nations. A slew of taxes, including central excise duty and state VAT, make up more than half of retail fuel prices, and the clamour to lower this has been rising. Fuel prices are also outside the purview of the Goods and Services Tax (GST) introduced in July 2017.
The central government has laid the responsibility for lowering the taxes at the states’ doorsteps. But neither side is ready to forgo the revenues from oil, as it forms a major chunk of their income. Last year, a study by the Comptroller and Auditor General showed that the government earned Rs 1.99 lakh crore in income from taxes on retail petroleum products in 2015-16.
India has the highest retail prices of petrol and diesel among South Asian nations