On Thursday, petrol prices were hiked by Rs 0.58 per litre and diesel prices reduced by Rs 0.31 per litre– the second revision of prices in a little over two weeks. Now, petrol will sell at Rs 64.21 in Delhi and diesel at Rs 52.59. Interestingly, the international fuel commodity prices have remained stable for the last few months, but that hasn’t been the case in India.
On August 31, a sharp rise in fuel prices was announced pushing up petrol prices by Rs 3.38 per litre and diesel by Rs 2.67. Oil companies argue that recent changes in commodity prices and Rupee-Dollar exchange rates warranted these price revisions. However, a deep dive shows the government can well afford to avoid these increases which have a significant effect on the economy as well as popular sentiment.
Over the past two years, the US has produced unprecedented amounts of oil. Along with that the demand from the Eurozone and major markets like Brazil and China have shown a decline indicating a slowdown in the economies. Iran’s entry into the international oil market after many decades has also contributed to a massive drop in crude prices. The fall in the case of India has been close to 75 per cent till January 2016 when it hit $26 per barrel from the November 2014 price of $106 per barrel.
The Indian government earns huge revenue through the high excise duties and VAT imposed on fuels and has remained intent on keeping the prices up and increasing it incrementally on an almost regular basis. This could be why the retail price of petrol now is almost the same as November 2014 — remember oil was at $106 a barrel then as compared to just over $43 per barrel now.
Interestingly, consumers pay more tax to the government than the actual cost of the fuel itself. In fact, for petrol and diesel, the consumer pays 57 per cent and 55 per cent as Excise Tax and VAT, according research by IndianSpend.com.
Over the last two years, the government has repeatedly argued that the reason it is not decreasing the prices is to encourage lower consumption for ‘environmental benefits’. However, fuel is the government’s cash cow and the earnings are fund infrastructure development.
The situation in India is similar to a lot of European countries where high imports of oil increases the negative balance of trade. Economists argue that keeping the prices high reduces consumption and hence has a positive impact on the economy. Furthermore, the government has maintained that over the period it has tried to slash subsidies by a deregulated price programme. But with such inflated prices, the subsidy is non-existent. The cost at which the government offers oil to oil companies and dealers is also not subsidised.
In all, the government’s policy of cutting fiscal deficit by regularly increasing excise taxes is risky. When the oil prices do actually shoot up in the international market, the oil companies will transfer the additional burden to the consumers. In that sort of a situation, the government will not necessarily compensate the increase by reducing excise taxes. As a result, the consumer will suffer more.
Also, in the unlikely scenario that excise taxes are decreased, disposable income increases in the hands of customers. It increases the purchasing power of consumers and revives customer sentiment. That will as a result boost revenues cutting across all sectors. It will also cut down inflation rates and allow the Reserve Bank of India to cut down benchmark rates and cost of borrowing–a major conflict point between the government and the RBI recently. So a dedicated stance on one issue can address a host of problems in the country, only if decision makers take solid action.
For future outlook, it seems that the government will keep the trend of incremental increases on track till early 2017, just ahead of the election season. Market watchers expect a moderate drop in prices just to woo the electorate at that point. Till then, it seems that there is no respite for the consumer.