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A L I Chougule explains the crude reality of why oil price decontrol is a one-way street

12:26 AM Feb 23, 2021 |

Retail prices of petrol and diesel have hit record highs across the country. On February 18, the price of petrol crossed the Rs 100 a litre mark in Rajasthan’s Sri Ganganagar district; the following day, it crossed Rs 100 a litre in Anuppur, Madhya Pradesh, while in Mumbai, it hovered around Rs 97. For the last two months, retail fuel prices have been consistently going up. Since March 2020, the price of petrol has gone up by nearly Rs 20 per litre and diesel by over Rs 17.50 a litre.

The government’s justification for this has been that global crude oil prices have risen more than 50 per cent since October 2020, forcing oil marketing companies to increase retail prices of petrol and diesel. That, however, is only half the story, as crude oil prices have not reached the prices of early 2020 but consumers of petrol and diesel are shelling out a lot more than they did in the last year.

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India imports more than 80 per cent of oil and 53 per cent of its gas requirement to meet the domestic demand. Retail prices of automobile fuel depend on the international prices of crude oil. Since retail prices of petrol and diesel have been decontrolled, when crude oil prices go down, ideally retail prices of both the commodities should also decline; similarly fuel prices move up when crude oil prices increase in the international market. But that doesn’t happen always and there has been a disconnect between the two since 2014.

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Consumer never benefits

In fact, even when crude prices had crashed to the lows of less than $30 per barrel a few years ago, retail prices did not come down significantly. In October 2018, for instance, the price of petrol in Delhi was Rs 84 per litre when international crude prices were above $80 per barrel; currently the price of Brent crude is hovering around $63.5 per barrel, but retail prices of petrol and diesel are at an all-time high. This is because oil price decontrol has been a one-way street and the consumer never benefits.

Fuel levies

The prime reason behind the staggeringly high fuel prices, despite relatively lower price of crude oil, is the government levies on petrol and diesel – the Central excise duty and value added taxes (VAT) of state governments – that make up a significant portion of what customers pay at the petrol pump. For example, at the beginning of 2019, the excise duty on petrol was Rs 19.98, which was hiked to Rs 32.98 by the Central government during the course of last year; similarly, the excise duty on diesel was increased to Rs 31.83 from Rs. 15.83 a litre over the same period. This was done to shore up government’s revenue, as economic activity had collapsed in the wake of the lockdown.

Likewise, a number of state governments had also hiked VAT to augment their revenue for the same reason. However, when crude oil prices had crashed because of the pandemic in April 2020, there was no downward revision in the retail prices of fuel and the benefit of low crude oil prices was not passed on to consumers.

Central and state government taxes currently account for over 60 per cent of the retail price of petrol and over 55 per cent of the retail price of diesel. Though crude oil prices have recovered from the lows of last year, consumers are hit hard by rising retail prices because the government, having used the opportunity to raise taxes earlier when crude prices were low, is not keen on lowering taxes now.

It is why, irrespective of the international crude oil prices, there is no relief for consumers because higher crude prices are passed on to them, while lower crude prices benefit the government, which keeps on raising levies. By and large, this has been the case since 2014. What’s surprising is that while the average price of crude oil was down around 14 per cent in January this year compared to a year ago, the average price of fuel in India is up by about as much.

No mass protests, now

Thanks to punishing Central and state taxes, it is no wonder that oil price decontrol has proved to be a boon for the government and a disadvantage for consumers. What is even more surprising is that before 2014 people used to be very angry about high fuel prices and political parties, particularly the BJP, used the opportunity to protest vociferously for mobilising public opinion against the UPA-2 government, but now nobody seems to care.

In fact, fuel price hike was one of the strongest issues, other than corruption and policy paralysis, that the BJP used to take up to run down the Congress-led government. BJP’s fuel hike protests included ‘jail bharo’ and Bharat bandhs, which at times compelled the UPA government to roll back fuel price hikes. Even the media played a key role in crystallising public opinion over fuel prices before 2014. But now the media is silent and the Opposition is even more silent, save an occasional attempt by the Congress and its leaders to register their protest on Twitter and in media briefings.

Free run for govt

High fuel prices don’t directly affect the poor; they affect the middle class more. But the indirect impact of high prices of petrol and diesel on inflation affects everyone, including the poor. However, with inflation fairly under control, at under six per cent and the middle class solidly behind Prime Minister Modi, there is little that the Opposition could do to agitate and crystallise public opinion against the government, like the BJP did before 2014, over the issue of rising fuel prices. The Opposition’s helplessness and media’s unwillingness, either voluntarily or out of fear, has made high fuel prices a non-issue. This has given the government a free run to hike taxes on petrol and diesel whenever it wants, which deprives consumers of the benefits of price decontrol.

Last Wednesday, while remotely laying the foundation stone for some key projects in the oil and gas sector in poll-bound Tamil Nadu, the Prime Minister blamed the predecessor governments for the rise in fuel prices. He said, had previous governments had taken measures to make India energy self-sufficient, India would not have to depend on imports for its oil and gas requirements. “Had we focused on these subjects much earlier, our middle class would not be burdened,” Modi added.

But it is also a fact that even the current government has done little to bring down India’s overdependence on imports of oil and gas in the last seven year. The point is, since taxes make up almost two-thirds of the retail price of fuel, the government has a lot of room to cut fuel prices. Stress on fuel prices is not an act of God and, therefore, cannot be termed a ‘divine predicament’ for the government to give relief to consumers of petrol and diesel.

The author is an independent senior journalist.

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