Economy and Business

Take reform to fuel

Many questions are being asked about the consumer price of oil. Why is the price today the same as it was when the crude price was twice as high? Aren’t the oil marketing companies (OMCs) making undue profits?

Sep 21, 2017
By Kirit Parikh
 
Many questions are being asked about the consumer price of oil. Why is the price today the same as it was when the crude price was twice as high? Aren’t the oil marketing companies (OMCs) making undue profits? Shouldn’t they bear the cost of rise in international crude prices? It has been reported that the government has asked the OMCs to absorb the increase in crude price and not pass it on to the consumers. Shouldn’t the government reduce taxes so that consumer price does not change?
 
 
I believe that the increase in costs should not be borne by the OMCs but should be passed on to the consumers. The government has, over the years, moved to a policy of marked to market pricing and any backtracking on it is not desirable. It will send a wrong signal to the domestic and international investors that the government’s policies are not stable; their perceived risk of investing in India would be higher. International investors have been concerned about retrospective tax impositions, from which we are just getting out. Any backtracking on the policy could have serious consequences for investments in the economy. Besides, charging the right price to consumers creates incentives for efficiency and will facilitate our move to electric mobility.
 
 
Why is the sale price of oil as high as it was when the crude price was twice as high? During that time, the government used to subsidise consumers; the government, OMCs and upstream public sector oil companies were bearing the losses. The level of under-recoveries (the difference between sales realisation and cost of supply — which is the subsidy to the consumers) over 2002-2003 to 2012-2013 was Rs 25,000 crore for petrol users and Rs 3,38,000 crore for diesel users. If the consumers got a bonanza then, they should not grudge a little extra revenue to the state. In any case, increase in the cost of diesel or petrol does not increase the revenue of the central government as the excise duty is specific, that is, it remains at the same level in rupee terms. Excise rate on diesel is Rs 17.33 per litre and on petrol it is Rs 21.48 per litre. Should the government lower these? I do not see why. It has subsidised consumers too long and there is no justification for doing so now.
 
 
There is, however, a case for adjusting the excise duty rates and make them equal for both diesel and petrol. This can be done in a way that does not change the excise duty revenue of the central government. It will increase the price of diesel by two per cent and reduce the price of petrol by six per cent. The benefits of doing this will be reduction in distortion, reduced demand for diesel, a fall in demand for diesel-driven vehicles, reduced air pollution, a fall in carcinogenic emissions and a decline in diesel imports. Of course, diesel users such as truckers, farmers, bus passengers and consumers will be affected. However, a recent study carried out at IRADe has shown the impacts to be miniscule and manageable. For example, truck freight rates may increase by one per cent, but the introduction of GST has reduced trucking costs substantially by eliminating the wait at checkposts for levies such as octroi. A two per cent increase in diesel prices can be easily absorbed and no increase in goods distribution cost may be expected. Thus, there should be no increase in consumer price inflation.
 
 
Apart from the central excise duty, the sale prices of diesel and petrol have increased because of the very high VAT rates imposed by the states. These vary from state to state. Madhya Pradesh imposes a VAT rate of 40 per cent on petrol and 32 per cent on diesel. The lowest rates are in Mizoram: 20 per cent on petrol and 12 per cent on diesel. Since VAT rates are ad valorem, that is, in percentage terms, they accentuate the difference created by excise duties. Thus, when the dealer price of diesel is Rs 30, the excise is Rs 17.33 and the dealer commission Rs 1.67, the cost for the state distributor would be Rs 49. Add to that 30 per cent VAT and the sale price becomes Rs 63.7 per litre (1.3×49), more than twice the cost without duty and tax. Similarly, for petrol with a dealer cost of Rs 31per litre, excise duty of Rs 21.48, dealer commission of Rs 2.52, and a VAT of 40 per cent, the sale price will be Rs 75.6 per litre — two and a half times the dealer cost.
 
 
Since the VAT rates are in percentage terms, whenever the cost of diesel or petrol increases, revenues of states go up. Thus, the states have a scope to reduce their VAT rates so that sale price of petrol and diesel can be moderated.
 
 
Ideally, all states should have a uniform GST rate for diesel and petrol. The states insist on keeping diesel and petrol out of GST as they would suffer a huge reduction in their revenues — the tax on diesel and petrol constitutes the bulk of the revenues of many states. Even with a high GST rate of 32 per cent, the states’ share of the tax would be around Rs 5 per litre. Today, however, they get as much as Rs 14 per litre of petrol and Rs 21 per litre of diesel. A mechanism needs to be developed to get the states to agree on the GST for petroleum products. Then the prices of diesel and petrol will come down dramatically.
 
 
Before agitating about petrol and diesel prices, the media and the Opposition need to understand the implications.
 
Indian Express, September 21, 2017

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