In­dia’s Tryst With Fuel Prices

In­di­ans are pay­ing more for petrol and diesel as In­dia isn’t an ideal geog­ra­phy for crude oil pro­duc­tion, but it should seek to ex­plore pro­duc­tion from its sed­i­men­tary basins

The Day After - - CONTENT - By dAnFEs

Fuel prices in In­dia have 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 per­cent, while in­creas­ing WPI in­fla­tion by 1.7 per­cent 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 per­cent for most states); re­tail price break­down of fuel prices re­veals that taxes con­sti­tute 43 per­cent and 33 per­cent 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 per­cent over the dealer price (in­clud­ing dealer com­mis­sions), and that of diesel by 60 per­cent. In re­cent years (2015-2017), ex­cise rev­enue com­prised 23 per­cent 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 per­cent (S Parikh, PK Singh, 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 per­cent 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 hy­dro crack­ing 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 201314 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 per­cent in 2013-14 to 82.8 per­cent 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 oil­pro­duc­ing na­tions.

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