Between May 13 and now, retail prices of petrol in the national capital have risen from Rs 74.63 to Rs 78.12 a litre, and from Rs 65.93 to Rs 69.06 a litre for diesel. This has obviously taken the shine off the Narendra Modi government’s celebrations of its four years in office. Low international crude prices for much of this government’s tenure helped keep India’s external current account deficit (CAD) in check, brought down the fiscal deficit by allowing excise duties on transport fuels to be raised, and boosted private consumption. But today, the shoe is on the other foot. Since November, Brent crude has crossed $60 a barrel, while breaching the $70 level towards end-March and going beyond $80 on a few occasions this month. Suddenly, the country’s external vulnerabilities are getting exposed. The CAD, which plunged from $88.16 billion in 2012-13 to $15.30 billion in 2016-17, is likely to have trebled to $45-50 billion during the fiscal just ended and projected to hit $75 billion in 2018-19.
But of equal concern is the pressure now on the Modi government to reduce excise duties on petrol and diesel. The increase in duties had resulted in a huge spike in the Centre’s excise collections from petroleum products — from Rs 88,600 crore to Rs 2,79,005 crore between 2013-14 and 2016-17. Any reduction now will be at the expense of the fisc, which is why both the Centre and state governments are loath to lower duties. The question is: How long can they resist the pressure, especially with less than a year to go for general elections (besides crucial Assembly polls in Rajasthan, Madhya Pradesh and Chhattisgarh before that)? Secondly, even assuming excise duties are slashed by a rupee or two now, what is the guarantee that global prices will not surge further? Rising interest rates in the US have made things worse, as it has triggered capital flows from emerging market economies. Since April, foreign portfolio investors have sold $6.33 billion worth of equity and debt in Indian markets, while the RBI’s foreign exchange reserves have also depleted by $9.49 billion during the same period. Any fiscal adventurism or let-up on macroeconomic stability in such an environment — both on the oil and interest rate/monetary policy fronts — would be a disaster. Equally ill-advised would be any move to restrain public sector oil marketing companies (OMC) from hiking prices or asking the state-owned crude producer, ONGC, to supply to domestic refiners at $70 a barrel or below.
Rather than trying band-aid solutions, the Modi government should do two things that will be genuinely pro-consumer. The first is to throw open the market to independent fuel retailers (IFR). In India, the OMCs also operate refineries. An Indian Oil Corporation, therefore, has an interest to source petrol or diesel only from its own refinery in Panipat or Paradip. IFRs, on the other hand, will buy or import from wherever it is the cheapest. This is what true deregulation is, as opposed to mere cost-plus daily price revisions, as is the case now. Secondly, it is high time petroleum products are brought under the Goods and Services Tax. GST may not stop prices from moving up, but will at least ensure no cascading of taxes.