At a time when Covid-19 has already taken a toll on thousands of lives and millions of livelihoods, there comes a new burden for consumers-soaring fuel prices. Over the past year, petrol prices in Delhi have risen nearly 24 per cent, with diesel prices rising 23 per cent. On February 22, petrol was priced at Rs 90.58 a litre in the capital, while diesel cost Rs 80.97. Rates were even higher in Mumbai, with petrol at Rs 97 a litre and diesel at Rs 88.06, both lifetime highs. In a few cities, such as Sri Ganganagar in Rajasthan and Anuppur in Madhya Pradesh, petrol has crossed the Rs 100 per litre mark.
Not only are high fuel prices burning a hole in consumers' pockets, they are also threatening to stoke inflation via increased transportation costs. A further spike in inflation could potentially prevent the Reserve Bank of India (RBI) from cutting lending rates, dampening India's efforts to engineer a sharp post-Covid rebound in growth. A recent survey by Local Circles, a community-based social media network, of 22,000 citizens across 291 districts, showed that Indians are cutting back on spending to cope with rising fuel prices.
There are two reasons for the soaring fuel prices. One is the increase in the price of crude oil in the international market. The price of Brent crude, the raw material imported by Indian refineries, was about $63 a barrel (about Rs 4,560) on February 22. This is a steep rise compared to crude prices in late March last year, when the world went into a lockdown. Crude prices had then crashed from the highs of over $70 a barrel (Rs 5,065) in January 2020, to around $14 to a barrel (Rs 1,013) on March 31. By May, prices had risen to the $20 (Rs 1,447) mark, and ever since, have largely trended upward. The development of vaccines for Covid-19 and higher fuel demand post the lockdowns led to a revival in international crude oil prices. Moreover, Saudi Arabia, the second-largest oil-producing nation after the United States, voluntarily cut oil production by one million barrels a day for the months of January and February in a bid to bridge the supply and demand imbalance. "Saudi Arabia is seeing a big threat to oil demand due to the continuing lockdown in several parts [of the world]," says Prashant Vasisht, vice president and co-head of corporate ratings at ICRA. OPEC (Organization of the Petroleum Exporting Countries) nations have also adhered to agreed supply cuts over January.
Graphic by Tanmoy Chakraborty, Illustration by Raj Verma
THE CRUDE IMPACT
India imports over 80 per cent of its crude oil requirements. Therefore, the increase in global crude prices directly impacts domestic fuel prices. In 2019-20, India imported 270 million tonnes of crude oil at a cost of $120 billion (Rs 8.76 lakh crore). With the economy emerging from the lockdown, the demand for fuel has soared, necessitating higher imports. In December, oil imports were about 29 per cent more than the previous month and about 11.6 per cent higher than a year earlier.
Since 2010, when petrol prices were decontrolled in India, prices have moved in tandem with international crude rates (the decision to decontrol diesel prices was implemented in 2014 to similar effect). Prices of petrol and diesel in India are fixed based on a 15-day average of benchmarked Arab Gulf fuel prices. Between April 1 and December 10 last year, petrol prices were revised 67 times. These revisions hit the headlines as fuel prices reached historic highs. "There are two main reasons behind the fuel price rise. The international market has reduced fuel production-[oil-producing] countries are producing less fuel to gain more profit. This is making consumer countries suffer," Union petroleum minister Dharmendra Pradhan said on February 21.
But crude prices alone aren't responsible for the soaring cost of fuel. Additional duties and cesses levied by the Centre and state governments are also to blame. "Crude oil breached the $60 a barrel mark only on February 8, 2021," points out Madan Sabnavis, chief economist with Care Ratings. Additionally, even when crude oil prices were in the region of $60-65 a barrel around January 20-24 last year, the price of petrol in Delhi was much lower, at Rs 73-74 a litre, and that of diesel, around Rs 67-68 a litre. Therefore, the role of taxes and cesses in the fuel price cost can't be ignored, he argues.
THE TAX EFFECT
Excise duty levied by the Centre is the highest component of petrol costs. As per price build-up data from the Indian Oil Corporation, on February 16 this year, when the cost of petrol in Delhi was Rs 89.29 a litre, excise duty accounted for Rs 32.90, and state VAT (value-added tax), Rs 20.61, comprising nearly 60 per cent of the total cost. In Delhi, excise duty on petrol ballooned from Rs 20 on February 16 last year to Rs 32.10 on the same day this year. In the same period, VAT rose from Rs 15.30 to Rs 20.60.
Rajasthan levies the highest VAT on petrol in the country, followed by Madhya Pradesh. The revenue earned from fuel is important for governments to compensate for the shortfalls they have seen in tax collections during the pandemic. Central and state governments generated Rs 2.1 lakh crore in revenues through excise duty and VAT on petro-products in the April-September period of the current fiscal. In 2019-20, the Centre and the states collected Rs 4.24 lakh crore through excise duty and VAT. Of this, Rs 2.23 lakh crore was collected from central excise alone. "This (fuel price issue) is very vexatious... An issue in which no answer except reducing the price will convince anyone," finance minister Nirmala Sitharaman said on February 20. There have been some indications from the government that bringing fuel under the Goods and Services Tax (GST) could help. And with states like Kerala, Tamil Nadu, Assam and West Bengal going into assembly elections, the fuel price issue has become a weapon for opposition parties to target the Centre.
CAUGHT IN A BIND
When the BJP was in the opposition, it had kept up the pressure on the then UPA government to keep fuel prices under check. In May 2014, when the Modi government came to power, petrol prices in Delhi were about Rs 70 a litre, with diesel at Rs 57. Narendra Taneja, a petroleum analyst and spokesperson with the BJP, explains that when the UPA was in power, the under-recoveries of oil marketing companies (OMCs) rose as they sold fuel at subsidised prices, with the government using financial instruments to subsidise the losses. Under the Modi government, with petrol prices steadily rising even when international crude prices were falling, the under-recoveries of OMCs disappeared, Taneja adds. But even as the ruling government tries to take credit for this, a former bureaucrat explains that the lower under-recoveries were largely on account of lower international crude prices. Lower crude prices gave the Modi government a lot of space to make up its revenue shortfall instead of passing on the benefit to consumers via cuts in fuel prices.
Fuel is outside the ambit of the GST, which is another reason why governments keep tweaking prices. The Centre also needs to compensate for the loss in revenues from taxes on fuel during the lockdown, when most economic activity came to a halt in the initial months. Similarly, the VAT increases by some state governments has been prompted by lower fuel revenues during the lockdown as well as lower share of GST collections from the Centre. As much as 85 per cent of states' revenues comes from various taxes, of which GST is the most significant.
The government now faces a difficult situation-high prices and high excise duties. "The government is in a dilemma and might have to cut excise duty," says former finance secretary S.C. Garg. "If [excise duty is] reduced by Rs 1 per litre on petrol and diesel, the annual implication is about Rs 12,000-13,000 crore in revenues." And for any notable impact, the reduction will have to be significant. "The government needs money. If it is [already subsidising] food and LPG cylinders, where will the money come from?" asks Taneja.
Experts suggest that the Centre could reduce excise duties by Rs 5 a litre and prod state governments to reduce VAT by another Rs 5 and OMCs by Rs 3 a litre. Garg says that with the assembly elections around the corner, the Centre will have to bite the bullet, one way or another.
Sources within the BJP say there are several reasons for the government's reluctance to implement price cuts. Some say it believes consumers should not get accustomed to lower prices-that could lead to excessive use, which could be detrimental to the environment. For states, VAT on petroleum products accounts for a big chunk of their revenues. Moreover, tax collections from petroleum products are transparent, efficient, reliable and without any leakages.
However, as fuel prices soar, the government is coming under heavy criticism. This makes tax cuts-both by the Centre and the states-seem the only way out.
THE COST OF HIGH FUEL PRICESA possibly higher inflation. Petrol and diesel have a combined weight of 4.69 per cent in the Wholesale Price Index and 2.34 per cent in the Consumer Price IndexA Higher transportation costs, which in turn will push up prices of essential commodities like fruits and vegetablesA Bearing on the RBI's decision on lowering interest rates. High inflation would mean a continued freeze on interest rate cuts