Petrol is no longer a good consumed only by the rich. On March 31, 2016, there were 169 million registered two-wheelers in the country, most of them run on petrol. The number of two-wheelers is growing at around 12 per cent per year. Thus, by now we are likely to have around 210 million two-wheelers. Today, we have around 290 million households. If we assume one two-wheeler per household, then around 70 per cent of the households have a two-wheeler. Of course, some households may have more than one two-wheeler and the households with two-wheelers may be around 60 per cent, many of which use them for daily commuting to work.
This explains why the media is screaming about the impact on the aam aadmi of the price of petrol. It is also why the government promises to provide some relief soon. Nearly half of the price of petrol is due to Central and state taxes. The dealer price, which reflects the international price for petrol, is Rs 37.89 per litre. Dealer commission is Rs 3.63 and central government excise is Rs 19.48/litre on petrol. This all adds up to Rs 61 per litre. States levy VAT on this dealer commission and excise inclusive price. In Delhi, VAT of 27 per cent is imposed, which amounts to Rs 16.47 per litre, bringing the consumer price to more than Rs 77 per litre.
When crude price is $60 per barrel, the price of petrol, including dealer commission and central excise, would be around Rs 51 per litre. A 27 per cent VAT rate would fetch the Delhi government Rs 13.77 per litre. Now when the price of crude is $80 per barrel, if the Delhi government were to reduce its VAT rate to 23 per cent, it would earn as much as when the price was $60 per barrel.
The central government can reduce excise by Re 1/litre and the state government can reduce the VAT rate by, say, 4 per cent to 23 per cent, and the price of petrol can be brought down by around Rs 4 per litre. The state revenue would be the same as when crude price was $60/barrel. However, the Centre will suffer a loss in its excise revenue from petrol of Rs 3,200 crore/year, as we consume around 26 million tonnes of petrol and one tonne has around 1,200 litres. A one-rupee reduction on excise on diesel will involve a loss of around Rs 9,700 crore.
How can the government make up this loss? The best way to do it is to reduce expenditure on subsidy on LPG by removing some 30 per cent of the households who can be identified as clearly well-off and neither require nor deserve LPG subsidy. This could save the government nearly as much as it will lose by reducing excise on diesel and petrol by Re 1 per litre.
It is also reported that the government is planning to impose a windfall gains tax on oil producing companies. Some windfall profit tax on ONGC for its production from allocated fields can be justified. However, domestic oil production from allocated fields is around 20 per cent of our consumption of petroleum products. So a cess of Rs 5 per litre would be required to compensate for the loss due to reduction in excise duty of Re 1. However, taxing ONGC is taxing itself as the government is a major shareholder owning two-thirds of ONGC and can require it to declare higher dividend.
Imposing such a tax on private companies would be a grave mistake. It will strengthen the belief of Indian and foreign investors that Indian policies are not stable and the policy risk is too high to invest in India for exploration and production of oil and gas. The loss to the country would be much larger if domestic oil production does not increase. What should the government do to reduce the country’s dependence on oil imports? There is little that it can do in the short run. In the medium run, a number of measures can be undertaken.
An important step is promoting cellulosic ethanol production from rice and wheat straws, which are currently burnt, causing severe air pollution in many states. A cellulosic ethanol plant that HPCL is building in Punjab will take 0.15 million tonnes (MT) of rice straw and produce 30 million litres of ethanol and 70 million units of electricity. If all the 15 MT of rice straw in Punjab and Haryana can be so processed, we can produce 3 MT of ethanol and 7 BkWh of electricity per year. If the rice straw and wheat straw and other agricultural waste products in the country can be used, the potential production can exceed 30 MT of ethanol and 60 BkWh of electricity. Setting up of these plants and establishing the needed policy framework may take some time but a target of three years can be considered feasible.
Another measure that can reduce the demand for petroleum products is promotion of electric mobility. While electric cars may take some time for setting up the needed charging infrastructure, electric buses can be introduced relatively quickly. The number of buses needs to be substantially expanded in most of our cities. The new buses should be electric ones. However, electric buses cost much more than diesel or CNG buses largely due to the cost of batteries. An electric car or a bus without battery should not cost more than a conventional vehicle. A battery swapping mechanism is feasible where a private entrepreneur buys the battery and charges for the use. It can reduce the need for initial outlay by the bus companies and bring down the running cost below the current level. Thus electric buses can be introduced quickly and the needed charging infrastructure at selected points on the bus routes could be set up by the time a city procures electric buses.
Electric two-wheelers should be introduced as soon as possible and pushed vigorously. A battery swapping or a battery rental scheme can make it attractive to users. To reduce our dependence on imported oil, we need a strategy to reduce demand and push substitutes.