The government cut petrol and diesel prices from Wednesday after multiple increases in the past six months. The petrol price was cut by Rs 1.46 a litre and diesel price was cut by Rs 1.53 per litre. After a sharp hike in petrol and diesel prices on August 31, incremental hikes have been announced regularly. The move to finally cut prices appears to be the start of a gradual price drop process to woo voters just ahead of the state elections.
The price cut was announced after six consecutive increases for petrol prices in the last three months and three in the case of diesel. Petrol will now sell for Rs 66.16 a litre in the capital while diesel will cost Rs 54.88 a litre. The earlier hikes came despite the global prices showing a downward trend from November 2014, when it was at $106 a barrel. Now, it is down to $43 a barrel. Ironically, the prices of petrol and diesel are about the same as they were back two years ago. During the time, the government had eased the taxes and levies imposed on petroleum products to ease the burden on consumers. However, after a massive drop of 77 per cent in global oil prices, the benefits of price drop were not seen to be transferred to citizens like in many other countries.
When you buy a litre of petrol or diesel from the petrol pump you end up paying massive amounts of taxes on the fuel. In the capital, 57 per cent of the price paid for petrol at a dealer outlet is Excise tax and VAT. Similarly, 55 per cent of the price of diesel is Excise tax and VAT.
The government has tried to compensate its target of plugging the gap in achieving the targeted fiscal deficit of 4.1 per cent of Gross Domestic Product. The rises in duties have increased the government’s revenue by thousands of crores with the three increases in January alone increasing the revenue by an additional 17,000 crore. The oil price in January this year had dropped to a 12 year low of $26 a barrel but the prices didn’t go down then as well.
The hike and drop process seems to be cleverly timed keeping in mind the election schedule and to offer some relief from the demonetisation woes. The government needs to give a good report card in the budget on February 1, 2017 and then perform well in the state elections in Punjab and Uttar Pradesh. So managing oil prices is crucial.
The petroleum products are essentially price inelastic. Therefore governments use it as a primary revenue generator. Excise tax has been increased five times this year. The Indian government earns massive revenue from the taxes and duties imposed on fuels and was understandably unwilling to cut down on the prices even though oil prices globally were dropping massively.
The government argues that price rise keeps consumption low and in an import-heavy economy like India, reduces the negative balance of trade. However, with the massive amount of money that the government and oil companies are minting, along with the absence of any subsidies on petrol and more importantly diesel, it controls the fuel politics for election seasons.
Commodity prices in international markets have remained largely stable over the last fiscal. Oil prices have been low, but fuel for the consumer hasn’t become cheap. The UPA proposed the deregulation of fuels like diesel and NDA implemented it when it came to power. The government knows that decrease in fuel prices not only will increase customer sentiment but will also boost purchasing power and boost revenue for different sectors. Diesel price cuts and revenue boost will mean cut in inflation rates and easing of RBI’s monetary policy. The government stands to take a lot of brownie points in the coming days.