High fuel prices: What is the solution?

Oil prices are punching a hole in consumers’ pockets but the government doesn’t seem keen on stopping the upward spiral

*On July 1, petrol was delivered at pumps for Rs 39.30 per litre. This precisely was the price charged to dealers but consumers have ended up paying over Rs 100 per litre for petrol for a long time.

*Similar is the case with diesel. While at pumps it is delivered at Rs 41.74 a litre. Many states have earned the distinction of diesel crossing the psychological mark of Rs 100 for a litre.

*Taxes that the Centre and states separately levy on the two fuels. It is almost 60% on the landed fuel at pumps. In case of some states, it is even more

* India levies one of the highest taxes on petrol and diesel in the world. The revenue generated by transport fuels, for both the Centre and states, is so much that none of them appear too keen to bring these in the ambit of the Goods and Services Tax (GST). For example, the excise duty from petroleum products contributes up to 90% of all excise duty collected by the Centre. The Centre levies an excise duty of Rs 33 on a litre of petrol. The states charge Rs 23 or thereabouts. It varies from state to state because some of them charge high VAT. The government has always depended on taxes on petroleum products to fill the coffers but it has become more brutal since 2014. Just for the record, before May 2014, excise duty on petrol was Rs 9.48 per litre, a 230% increase in seven years. On diesel, central taxes were Rs 3.56 a litre, prior to 2014. Today it is at a kissing distance of Rs 32.

*Petrol and diesel have a combined weight of 4.69% in the wholesale price index and 2.34% in the retail price index. Any increase in the prices of the transport fuels affect the WPI more than the CPI but what is more worrisome is the pass through effect the increase in fuel prices can cause.

*The government can offset the prices by lowering excise duty slightly, which saw an exorbitant hike during March last year. This window, the experts say, is available to the government only this year. Next year, when the demand for transport fuels comes back to pre-pandemic levels and there is sharper upward revision, the risk to inflation will be much higher and may leave no ammunition with the government.

Risks from higher oil prices are generally manageable in the financial year 2021-22, given the scope to adjust excise duty and other factors. But, risks are greater in 2022-23 based on our global oil price forecast, now revised up to $75 a barrel.

Fuel prices in India are at record high even though Brent is well below its peak. But, responding to a question on increasing fuel prices, and whether the government was considering reducing excise duty, Finance Minister Nirmala Sitharaman recently said the duties on petrol are levied both by the Centre and the states and both would have to work together on this. On bringing petroleum products under GST, she said there were no hurdles from the Centre’s side, and the GST Council would have to take a call.

Prices of petrol and diesel in the neighbouring countries of China, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan and Myanmar are much less than that of India, according to globalpetrolprices.com that tracks retail prices of motor fuel, electricity, and natural gas in over 150 countries. None of these produce their own oil. They too import a substantial proportion but taxes in these countries are not as high.

Reducing taxes is the best solution to check the spurt in fuel prices which would also tremendously help India on the exports front. 

Ashwan. E

Thirmathi Mishal

I Semester B Com Finance