FUEL PRICES: A BURNING ISSUE
The month of June was a cruel—and disorienting— one for Indian consumers. For three weeks on the trot, starting June 7, oil marketing companies (OMCs) raised prices of petrol and diesel almost every day. In 22 days, the prices of petrol and diesel, in Delhi, rose by Rs 9.13 and Rs 11.10 a litre—an increase of 13 per cent and 16 per cent, respectively. In a first, diesel became more expensive than petrol (in Delhi), causing worries of higher logistics costs and the cascading effect on prices of essential goods, at a time when the movement of goods was already hit by sundry Covid restrictions. Prices seemed to have finally stabilised in July; on July 7, petrol and diesel were at Rs 80.43 and Rs 80.70 a litre, respectively, in Delhi.
The sharp increase in retail prices of fuel was even more disconcerting because it came at a time when global crude oil prices were range-bound and low (see graphic: Unreal Rise). For much of the three-week period of neardaily hikes in petrol/ diesel prices, crude prices were in the $40 per barrel range, provoking irate questions from opposition leaders on why, on the contrary, lower crude prices had not translated into lower fuel costs for the consumer. Congress leader Priyanka Gandhi-Vadra accused the government of “picking people’s pockets” during a crisis.
What explains the rise then? In one word: taxes, which account for over 60 per cent of what the endconsumer pays at the fuel station. The sharp if staggered upward revision in excise duty on fuel by the Union government and on value-added tax (VAT) by state governments is why retail prices have gone through the roof. To illustrate, when the price of petrol in Delhi was Rs 80.47 a litre on July 1, the excise duty component was Rs 32.98 and VAT Rs 18.57. For diesel, which cost Rs 80.56 a litre, excise duty was Rs 31.83 and VAT Rs 18.84. (The other component of price is dealer commission; see graphic: The Cost Breakdown.) Excise duty, which was Rs 20 for petrol and Rs 15.80 for diesel on February 16 this year, was raised to Rs 33 and Rs 31.80, respectively, on May 6. VAT was raised from Rs 15.30 for petrol and Rs 9.50 for diesel, on February 16, to Rs 16.4 and Rs 16.3, respectively, on May 6, and further to Rs 17.7 and Rs 17.6 on June 16.
By increasing excise duties by
Rs 13 for petrol and Rs 16 for diesel in a matter of three months, the Centre was compensating for the loss of revenue it incurred from lower fuel sales during the lockdown. Madan Sabnavis, chief economist with Care Ratings, says the Centre and states “have together lost Rs 5-5.5 lakh crore in revenues on excise and VAT from fuel. That’s a huge sum.” Fuel does not come under the ambit of the Goods and Services Tax (GST), which is another reason why the government keeps tweaking fuel prices. States were additionally constrained to increase VAT because they haven’t received their full share of GST collections from the Centre. As much as 85 per cent of states’ revenues comes from various taxes, of which GST forms the biggest chunk. However, states cannot revise GST rates, which are determined by the GST Council. A third of the tax revenue of states comes from sales tax and excise, mostly taxes on liquor, fuel and tobacco, which state governments leverage to their advantage.
As a result of the high prices of diesel in Delhi, fuel dealers have raised the
THE SHARP HIKES IN EXCISE DUTY AND VAT ARE A WAY FOR THE CENTRE AND STATES TO MAKE UP THEIR MASSIVE REVENUE LOSSES DURING THE LOCKDOWN
alarm, stating that this encourages smuggling of diesel into the country’s capital and is hurting fuel station owners. The Delhi Petrol Dealers’ Association has reportedly written to the state government, saying, ‘The diesel price is more than the petrol price only in Delhi, as the rate of VAT on both products [here] is 30 per cent.’ The letter goes on to add that everywhere else in the country, including in Delhi’s neighbouring states, the difference in rates between the two products is still Rs 6-9 per litre.
Sabnavis explains that governments may find it expedient to tax diesel more when petrol consumption is down because fewer privately owned vehicles—the primary users of petrol—are out on the roads in the time of Covid. Governments know that there is no real risk of stoking inflation because petrol and diesel have a combined weight of 4.69 per cent in the wholesale price index (WPI) and 2.34 per cent in the consumer price index (CPI). Any increase in the prices of auto fuels will affect the WPI more than CPI. And it is mainly the CPI that the Reserve Bank takes into account while tweaking interest rates. “What is more worrisome is the ‘pass-through effect’ of the increase in fuel prices,” says Sabnavis. (The ‘pass-through’ effect is the portion of the increase in a raw material or input cost— like fuel—which is passed on to consumers.)
K. Ravichandran, senior VP and group head of corporate ratings at ICRA, says diesel was traditionally priced lower in India only because it was subsidised. That distinction went away with the subsidy. In the international market, bulk purchases of diesel cost more than petrol, he points out. Meanwhile, crude oil prices have begun to crawl up again, crossing the $42 mark (it was $42.7 a barrel on July 7). Will this be reason for a further, unsupportable increase in prices at the fuel station? Keep your fingers crossed.