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Indian consumers are paying for fuel and petroleum products than ever before. The fuel prices are skyrocketing in India and are almost double than what neighbouring countries are charging, with an exception of China. Although the petrol prices were revised marginally and were brought lower for the fifth consecutive day on Sunday, June 3rd, 2018, however, the diesel prices remain unchanged from the all-time high prices. According to Indian Oil Corporation’s website, fuel prices in the four metro cities stands as follows: Delhi at Rs. 78.11, Kolkata at Rs. 80.75, Mumbai at Rs. 85.92 and Chennai at Rs 81.09 (Indian Oil Corp. 2018)[1].

One of the main reasons why global fuel prices are rising is the tight global supply and geopolitical tensions. These concerns have effected the Brent Crude Oil prices as it crossed USD 80 per barrel mark for the first time in four years. Organisation of the Petroleum Exporting Countries (OPEC) nations had a desire to hit USD 80 per barrel, which was realized on May 17th, 2018. OPEC nations introduced supply cuts starting from January 2017 in an effort to end the global oil glut (Lawler, A., Gamal, R., Nasralla, S., 2017)[2]. The cartel is expected to continue the cuts through the end of this year and is scheduled to meet on June 22nd, 2018 to discuss the further course of action (OPEC, 2018)[3].

Another factor pushing the global pricing is the looming possibility of high degree altercation between the USA and Iran. USA President Donald Trump has announced withdrawal from the Iran Nuclear Deal and subsequent sanctions against Iran, specifically on exports. Iran pumps almost 4 percent of the world’s oil and any nation trading with Iran might have to face sanctions as well (as stated by President Trump in his statement) (“Full transcript of statement, 2018)[4]. Even in Latin America, Venezuela’s oil industry has collapsed. Despite holding one of the world’s largest reserves of heavy crude oil, Venezuela’s foreign oil sales have fallen 40 percent from April 2017. Following the controversial Presidential elections - which the USA has already refused to recognize – we can expect more USA sanctions on Venezuela’s finances and logistics further decreasing the already crushed output.

When the crude prices started falling to almost USD 28.94 per barrel in January 2016 after reaching USD 114.81 per barrel in June 2014, the Indian Government was found to be the biggest beneficiary in terms of the windfall gains by increasing taxes on petroleum products. The government decided to maintain the price level for the end consumer by increasing the excise tax (the tax levied by Central Government) on petrol and diesel nine times, which amounts to Rs 19.48 per litre on petrol and Rs. 15.33 per litre on diesel (Petroleum Planning and Analysis Cell, 2018)[5]. In all, the excise duty on petrol was hiked by Rs. 11.77 per litre and on diesel by 13.47 a litre, which helped the government muster Rs. 2,42,000 crores in fiscal 2016-17, from Rs. 99,000 crores in fiscal 2014-15. Increased taxes guaranteed that the consumer never realized the benefit of plunging crude oil prices. On various occasions, the government has justified the increase in taxes as a conservative step to ensure stability of fuel prices in conditions when the price of crude oil rises, however, evidently, that has not happened.

Many economists and experts have called upon the Central Government to reduce excise duty. However, according to NITI Aayog Vice President Mr. Rajiv Kumar, even a Rs. 1 decrease in the excise duty could possibly result in a loss of Rs. 13,000 crore of tax revenue, which by any measure is a huge loss (Jaiwal, 2018)[6]. Historically, taxes on petroleum products have been on the higher side given that the demand for petroleum is highly inelastic, which is primarily why people will continue to buy petrol and diesel regardless of taxes.

Under the current tax regime, the state governments charge the Value Added Tax (VAT) on ad valorem basis (fixed percentage of price), which increase proportionate revenue along with the increase in base price. Considering the volatility in the prices, the Kelkar Tax Reforms Committee in its suggestion had said that the VAT should be specific basis rather than on ad valorem basis, however, no states have reformed the taxation system yet (Kelkar, 2013)[7]

Another highly discussed and debated solution to ease the consumer pain is bringing petroleum products under the GST. According to the estimates, even if petroleum products are charged at the highest GST rate of 28%, the prices of petrol and diesel for the consumers would be below Rs. 50, an idea sponsored by none other than the Minister of Petroleum and Natural Gas, Mr. Dharmendra Pradhan (“Fuel price”, 2018)[8]. This will help to bring uniformity in prices, as fuel charges in India vary from state to state, according to the given VAT charges. However, this reform will lead to huge cost as the government will have to forgo a large portion of their revenue and might end up charging additional cess, such as ‘Sin tax’, as levied on alcohol and tobacco to cover the lost revenue.

Whatever solution the present government might come up with, each day’s delay is bringing massive political fallout for the Modi regime. The fact that fuel prices didn’t rise in the run-up to Karnataka elections, and witnessed a sharp rise immediately after polling was over has raised a lot of eyebrows, questioning whether the fuel prices are completely deregulated or not. Petrol/diesel prices aren’t luxury goods and effects prices of almost every commodity. The way the Modi government chooses to deal with the crisis will have a severe impact on the Assembly elections later this year, and 2019 general elections as well.

 

[1] Indian Oil Corp. (2018, June 3). Daily Fuel Price Update. Retrieved from the Indian Oil Corporation website https://www.iocl.com/TotalProductList.aspx

[2] Lawler, A., Gamal, R., Nasralla, S., (2017, November 30), OPEC, Russia agree oil cut extension to end of 2018, The Reuters, accessed on June 1st, 2018, https://www.reuters.com/article/us-opec-meeting/opec-russia-agree-oil-cut-extension-to-end-of-2018-idUSKBN1DU0WW

[3] Organisation of Petroleum Exporting Countries. (2018), OPEC Meetings update, accessed on June 1st, 2018, Retrieved from OPEC ebsite http://www.opec.org/opec_web/en/311.htm

[4] Full transcript of statement by US President Donald Trump on JCPOA, (2018, May 8), The New York Times, accessed on June 1st, 2018, https://www.nytimes.com/2018/05/08/us/politics/trump-speech-iran-deal.html

[5] Petroleum Planning and Analysis Cell (2018), Petroleum, Prices, Central Excise and Customs Tariff Table, Retrieved from the PPAC website: http://ppac.org.in/WriteReadData/userfiles/file/PP_2_CustomsExciseTariff.xls

[6] Jaiswal, N., (2018, May 29), Centre, State Should Cut Taxes On Fuel, Says NITI Aayog Boss, The NDTV, accessed on June 2nd, 2018, https://www.ndtv.com/india-news/fuel-price-hike-niti-aayog-chairperson-rajiv-kumar-says-centre-state-should-cut-taxes-on-fuel-1859011

[7] Bandyopadhyay, K.R., (2009), Petroleum Pricing in India: Transition from APM to MDPM. MPRA Paper No. 25905.

[8] Fuel price hike and the GST, (2018, May 24), The Indian Express, accessed on June 3rd, 2018, http://indianexpress.com/article/india/fuel-price-hike-live-petrol-diesel-prices-hit-new-high-cross-rs-77-in-new-delhi-rs-85-in-mumbai/

 

Image Source: DNA India

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Written By Parth Gupta

Political Analyst | Economics Students | International Laws

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