In the 1970s, the Government of India nationalised the petroleum sector and set the ball rolling for a long and bitter legacy. Since then Indian consumers have been paying a high price, literally and metaphorically, for low quality fuels. No consideration has been shown to the customer on this count. Nothing illustrated this better than the sharp rise recently in the selling price of petrol and diesel just after elections were held in Karnataka.
High fuel prices – following closely the intense hardships caused by the demonetisation of Rs 500 and Rs 1000 notes and the confused roll-out of the Goods and Services Tax (GST) – seems like a very cruel joke on citizens.
How & Why was this Done?
Fuels are sold by oil marketing companies (OMCs) owned by the government. As a result they form the worst sort of economic lobby called a cartel. The OMCs collaborate on devising common figures based on how much it costs all of them to produce fuel at their refineries, and how much more it costs to take it to the petrol pump to sell to the consumers. This ensures we have no transparency on how much fuels should legitimately cost. We only know that fuels are being sold at artificially high prices.
Not to be overlooked is the fact that the government makes a vast amount of money from taxes on crude petroleum as also on petrol and diesel. When rolling out the GST, it was conveyed that there would be a shortage in revenue collection and the government would use oil price to create a revenue pool as a sort of insurance money.
Using this excuse, all hell was let loose and a stupendous Rs 2.579 lakh crore was collected from taxes on petroleum products by March 31, 2018. This collection was around Rs 88,600 crore in 2013-14, while in 2016-17, collection was Rs 2.016 lakh crore.
Now that GST collection has stabilised at around Rs 1 lakh crore a month there is no justification for taxes being so high on petrol and diesel.
Who Says What?
Ruling political parties know that such high prices can hurt them so some action is expected.
The larger picture is that every Indian individual or company directly and indirectly uses petrol and diesel, so high prices will cause inflation.
The Reserve Bank of India (RBI) monetary policy team has warned about inflation. So consumers are not only paying heavy taxation but suffering from inflation as well.
High fuel prices are increasing the cost of transportation and making manufacturing costlier.
The government line is well known. Petroleum Minister Dharmendra Pradhan says India needs billions of dollars to buy crude oil. In 2017-18, India spent $87.72 billion to buy oil from the international market, procuring 213.9 million tonnes (MT) of crude (about 78 per cent of demand). He added one dollar cost Rs 63.90 on February 1, but by May a dollar cost Rs 68.05. His logic is unacceptable.
Most countries import crude oil and most currencies in the world have lost value against the dollar, but only the Indian consumer pays such a high price for petrol and diesel.
In contrast, former Finance Minister P Chidambaram says the government can reduce the selling price by more than Rs 20 a litre by cutting down on its tax collection.
Opposition leaders say the loss to the government and to people on account of inflation caused by costly petrol and diesel is a real threat as the economy is slowing down.
In fact, the government’s own Economic Advisor Arvind Subramanium (who has just resigned) said the main aim now should be to avoid inflation, hinting at the lowering of fuel prices.
Experts suggest various ways to tackle the problem and here are some of the most popular.
Excise is charged by the Centre while VAT is charged by the states. In April 2018, taxes amounted to 47 per cent of the price of petrol and 38 per cent of diesel. While government sources claim every Rs 1 reduction in taxes per litre of fuel causes a `13,000 crore annual loss in tax earnings, the inflationary impact of high prices is far greater.
If petrol and diesel are under GST, it will be in keeping with the promise made to the nation when GST was introduced. Instead of simplifying tax collection under a single GST system, the government has multiplied tax complexity by maintaining a GST bureaucracy for all goods and a parallel old structure for excise and VAT. If 18 per cent GST is fixed for petrol, the 47 per cent tax will come down by 29 per cent! Petrol will cost around Rs 48 per litre.
There is a higher GST slab of 28 per cent but even that will mean big savings.
India pays more for crude oil which comes mostly from Saudi Arabia via the Dubai/Oman market. A new source could have been Iran but the US Government’s trade war, and the actions of the oil cartel OPEC are problems. So this is the most difficult option. The good news is that Mr Pradhan says a long-term solution to bring down oil prices is being worked out. Amen to that.
As crude oil prices have risen, experts says Indian crude oil companies have super profits. The government-owned ONGC (which supplies 20 per cent of the country’s crude and owns Hindustan Petroleum) has made ‘windfall gain’ from rising oil prices. It can be asked to pay a special tax on its super profit and adjust its dividend to the government this year.
Indian Commodity Exchange (ICEX) can launch futures on petrol and diesel. Futures are financial contracts which obligate the buyer to purchase an asset or the seller to sell an asset at a predetermined future date and price. So, a futures deal involves buying specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future. This will prevent daily swings in prices.
Government-owned oil companies work in collaboration as a cartel using excuses like rising international prices and secret production and logistics cost formula to distort the domestic pricing structure and make it unfavourable to consumers .
Experts agree that it is important to have rational prices for all petroleum products.
Experts say OMCs are using the government assurance to pay them a subsidy to make up any losses that arise out of cartelised, opaque production and delivery cost structure.
Government OMCs have prevented the emergence of private sector competitors (as they cannot claim the government subsidy).
In addition, the government benefits as all profits made by OMCs are paid back as dividend to itself as a shareholder. Unless taxes are reduced and true competition is allowed, consumers will remain at the mercy of price rises and arbitrary decision-making by a cartel.
India needs an efficient and competitive oil economy that promotes a more convenient use by consumers and an appropriate choice of fuels.
Instead, what we have today are price control, subsidies and taxes leading to distortions.