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Global oil price crash brings a windfall for the govt, just a dribble for farmers

The Centre has defended its decision not to pass on the entire benefit of declining oil prices to consumers.

Written by Harish Damodaran | Updated: December 18, 2015 12:23:41 am
Oil price, Diesel price, Narendra Modi government, petrol consumers, Explained the total gain to consumers would work out to around Rs 1,23,000 crore on an annual basis — Rs 92,000 crore from diesel and Rs 31,000 crore from petrol.

Between June 2014 and now, roughly coinciding with the time the Narendra Modi government has been in office, retail prices of diesel have fallen from Rs 57.28 to Rs 46.09 per litre, while declining from Rs 71.51 to Rs 59.98 per litre for petrol (in Delhi).

Taking consumption of 8.2 crore kilolitres of diesel and 2.7 crore kilolitres of petrol per year, the total gain to consumers would work out to around Rs 1,23,000 crore on an annual basis — Rs 92,000 crore from diesel and Rs 31,000 crore from petrol.

But the gain should have been much more, considering the extent by which international prices have fallen. Since June 2014, the ex-factory realisation, or the price at which refiners here sell to oil marketing companies — which is directly linked to international rates — has more or less halved from Rs 46.29 to Rs 22.79 per litre for diesel and from Rs 45.22 to Rs 23.53 per litre for petrol.

Had this sharp fall in global prices been fully passed on, the overall annual benefit to consumers would have been over Rs 2,51,000 crore — about Rs 1,93,000 crore on diesel and Rs 58,000 crore on petrol.

So, who has pocketed the intermediary gains that ought to have accrued to consumers in the natural course?

One of them, of course, is the Centre. Since June 2014, the specific excise duty on diesel has been hiked from Rs 3.56 to Rs 11.83 per litre, and from Rs 9.48 to Rs 19.36 per litre for petrol. The annual revenue gain to it from these increases would add up to Rs 95,000 crore or so — Rs 68,000 crore from diesel, and Rs 27,000 crore from petrol.

But the Centre’s gains would be larger if one were to take into account the fact that until barely a couple of years ago, oil marketing companies were losing money on diesel sales. The underrecoveries on diesel amounted to Rs 81,192 crore in 2011-12, Rs 92,061 crore in 2012-13, Rs 62,837 crore in 2013-14 and Rs 10,935 crore in 2014-15. A significant part of this burden had to be borne by the Centre, either directly as subsidy from the exchequer, or as lower dividends from national oil companies.

But today, the underrecoveries on diesel have been completed wiped out, with prices of the fuel being decontrolled from October 18, 2014. Rather than being a burden on the exchequer, diesel has turned into a milch cow yielding easy revenue to the Centre. Interestingly, states haven’t made as much a windfall from the crash in global oil prices, partly because they levy value-added tax on petro products on an ad valorem percentage basis, as opposed to the specific (Rs per litre) excise duty charged by the Centre. The Delhi government’s effective VAT incidence on diesel, for example, has gone up only marginally from Rs 6.61 to Rs 6.81 per litre, while rising from Rs 11.92 to Rs 11.99 per litre for petrol between June 2014 and now.

The Centre has defended its decision not to pass on the entire benefit of declining oil prices to consumers, citing both fiscal compulsions (especially the need to find additional resources for public investment), as well as addressing climate change. As Chief Economic Advisor Arvind Subramanian wrote in an article for The Indian Express (May 13, 2015): “On petroleum products, India has moved from a carbon subsidisation regime to one of significant carbon taxation — from a negative price to a positive price on carbon emissions. And the shift has been large.”

That, needless to say, hasn’t gone too well with consumers, including the farm sector (tractors, agri-implements and pump sets) that has a 13 per cent share of end-use for diesel (See chart above). “When they raise prices, they do it in rupees. When they reduce, they do it in paise,” says Pritam Singh Hanjra, a farmer from Urlana Khurd village in Madlauda tehsil of Haryana’s Panipat district.

“My costs of fertiliser, pesticide and labour have gone up, even as I am getting lower prices for basmati paddy than two years ago. The one respite that I could have had was on diesel, but even there the price hasn’t fallen as much as it should have,” he says.

Hanjra estimates diesel consumption for wheat cultivation alone to range between 25 and 45 litres per acre. That includes 15 litres for field preparation and sowing, and 10 litres for threshing. The balance is for irrigation. If electricity is available, there is no need for diesel. But if pump sets are used, each irrigation will consume about 5 litres of diesel. Typically, four irrigations are given — more in bad monsoon years such as the current one.

According to a 2012-13 study by Nielson India for the Petroleum Ministry, trucks (heavy/light commercial vehicles), buses and the farm sector together accounted for 51 per cent of the country’s total diesel consumption. Cars and UVs (both personal and commercial) — the target of the Supreme Court’s clampdowns — had a share of only 22 per cent.

harish.damodaran@expressindia.com

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