Sunday, Sep 23, 2018 | Last Update : 05:37 AM IST

Rising fuel prices: The road ahead

THE ASIAN AGE. | PAWAN BALI
Published : Sep 9, 2018, 6:24 am IST
Updated : Sep 9, 2018, 6:27 am IST

US sanctions against Iran, the third biggest exporter of oil to India, make it difficult for its allies like India to manage the oil demand supply.

Rising oil prices could cause significant inflation, dampen economic growth and alter geopolitics in multiple ways this year.
 Rising oil prices could cause significant inflation, dampen economic growth and alter geopolitics in multiple ways this year.

Petrol and diesel prices are spiralling out of control. the government seems to be looking away and pointing towards global issues. But as fuel prices continue to pinch consumers, the question remains — Have we done enough to tackle the crisis?

Petrol and diesel prices are on a fire again, hitting farmers, transporters, fishermen, consumers and commuters. India meets over 80 per cent of it’s fuel demand through imports so prices are largely dependent on external factors and taxes by Centre and state governments.  The current spurt in fuel prices is due to two factors: free fall in Indian rupee’s value in the international currency market and the volatility in international prices of crude.

India deregulated the price of petrol in 2010 and that of diesel in 2014, ending government’s control over fuel prices that are now decided depending upon the price of crude oil in international market. So, every time there is an increase in crude prices public sector oil marketing companies pass on the hike in to consumers, on a daily basis.  

This week the rupee fell to a new low of 71 against US dollar. The rupee has now depreciated over 6 per cent since June 2018. This depreciation of rupee against the dollar has made import of crude oil costlier.  

Due to geopolitical factors international crude oil prices are also volatile. In its earlier years, the Narendra Modi government benefited from a low global crude oil prices due to excess crude inventory world-wide. In initial years of the Modi government, the crude prices had fallen to below $40 a barrel against high of $120 per barrel witnessed during UPA 2. Crude oil prices were hovering around $76.16 a barrel on Friday.

Since the UPA-2 days, oil producing countries have tried to bring down their production to jack up crude oil prices and geopolitical tension has made things worse. However, when crude oil prices were falling the Modi government started hiking taxes on petrol and diesel to increase its tax kitty. So consumers in India did not really benefit from lower global prices. But now when international crude oil prices are rising and the rupee is falling, consumers have to bear the burden.  

Between November 2014 and January 2016, Centre had raised excise duty on petrol and diesel on nine occasions to take away most gains arising from plummeting international oil prices. In all, duty on petrol was hiked by Rs 11.77 per litre and that on diesel by Rs 13.47 a litre. However, in October 2017, the Centre had reduced basic excise duty on petrol and diesel by just Rs 2 per litre.

Excise duty on petrol is currently at Rs 19.48 per litre and on diesel by Rs 15.33 a litre. Besides, the states also impose high rate of taxes on fuel that vary from one state to another.

The lowest tax on fuel is charged in Andaman and Nicobar Islands where a 6 per cent sales tax is collected on both the fuels. Mumbai has the highest VAT of 39.12 per cent on petrol, while Telangana levies the highest VAT of 26 per cent on diesel. Delhi charges a VAT of 27 per cent on petrol and 17.24 per cent on diesel. The total tax incidence on petrol comes to 45-50 per cent and on diesel, it is around 35-40 per cent.

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However, the Centre currently does not want to reduce taxes on fuel as this might hit its revenue. Taxes from GST have not been as per expectation and shortfall in taxes could hit government’s fiscal deficit target of 3.3 per cent of the GDP. Besides, finance ministry officials thinks that while a Rs 2-3 cut in tax may not provide a large benefit to general public, it will have an adverse impact on revenue.

With Assembly elections scheduled in four important states including Madhya Pradesh and Rajasthan soon, the Centre is under pressure to intervene and offer relief to people.  

Opposition parties have also announced nation-wide strikes and protests over the record-high fuel prices.

Oil minister Dharmendra Pradhan has suggested bringing petrol and diesel under GST to bring down taxes on diesel and petrol to give relief to consumers. However, states are reluctant to let go of their right to tax petrol and diesel.

During the last GST Council meeting not a single state agreed to include petrol and diesel in the GST list as they wanted some scope for manoeuvring taxes to raise funds during crisis.

States, especially Kerala, pointed out that with everything being brought under GST, states’ options to raise resources have come down. They said that products that are outside GST’s purview should remain so.

It seems consumers will have to bear high fuel prices until political pressure forces governments to reduce taxes on fuel, work out some alternative mechanism for oil prices or external factors improve.

Tags: fuel prices, modi government, dharmendra pradhan, gst council