Once called "black gold", oil is now giving sleepless nights to many exporting countries, which may be pushed to the brink of bankruptcy if prices don’t rebound anytime soon (an unlikely event). The money that would buy a barrel of oil two years ago can now buy at least three. While cheaper oil sounds like a dream come true for a developing and fuel-guzzling nation like India, fuel consumers are yet to substantially benefit from the price drop.
Last week, some news reports claimed that crude oil is cheaper than bottled water in India. The calculation was based on the cost of crude oil, which amounts to Rs 12.58 per litre when imported into India as opposed to a litre of packaged mineral water, which sells for Rs15- Rs 20 in the country.
Admittedly, crude oil is not fuel for vehicles and needs to be refined, filtered and marketed by oil companies before powering our cars. But the larger question remains the same: why aren’t petrol and diesel much cheaper than they were three years ago when crude oil was at least thrice as expensive?
Revenue gains
As always, the devil is in the details. With its power to tax fuel marketed by oil companies, the Indian government has effectively been able to keep the prices artificially high.
On four occasions since November 2014, including twice in the first fortnight of 2016 alone, it has raised levies such as central excise duty to substantially increase its revenue. These hikes have already contributed more than Rs 23,000 crore to the state exchequer and the revenues are only expected to increase as oil prices fall further and tax rates rise. While the government has also been cutting fuel prices by a few rupees every now and then, it has rarely passed on the full benefit to the consumer.
Consider Friday’s price cut, for instance, when petrol was made cheaper by 32 paise per litre and diesel prices were slashed by 85 paise per litre. The cuts were much lower than the fall in crude prices would have warranted, but the government had already managed to raise excise duties on petrol and diesel by 75 paise per litre and Rs 2 per litre respectively.
As seen in the chart above, the total excise duty on petrol was a mere Rs 9 in November 2014, but has since climbed past Rs 20 owing to government intervention. Similarly, unbranded diesel now attracts an excise levy of almost Rs 16, as opposed barely Rs 3.50 in November 2014.
In Delhi, petrol now costs Rs 59.03 per litre while diesel costs Rs 44.18 per litre – certainly among the lowest rates seen in the last year or so. However, if the government were to fully disburse the benefits from the fall in oil prices, petrol and diesel would have become cheaper by at least Rs 15-20 per litre.
Deceit or strategy?
Consumer interests aside, fuel prices have also attracted a fair amount of political attention as parties often take up the issue of rise in fuel costs. The Congress have blamed the Bharatiya Janata Party-led government for “profiteering” from low prices, labelling price rise as the “Modi government’s gift to the nation”.
The government has defended itself by claiming that a significant change in the dollar exchange rate has made it more expensive to buy fuel. In addition, it also claims that many states have raised their Value Added Tax rates, thus nullifying the effect of cheaper oil.
However, it appears that clever fiscal management is at play. By not reducing the fuel prices as warranted by global rates, the Union government has already raked in thousands of crores to fund its budget, and expects to make another Rs 3,700 crore in the remaining three months of the current financial year.
“Revenue from excise duty on petroleum forms a significant portion of the government’s collections," Saloni Roy, senior director, Deloitte India told Business Standard. "With the increase in excise duty on motor spirit and diesel, government revenue will be augmented.”
This argument, however, affects the hypothesis that cheaper fuels will increase the attractiveness of country’s produce, which often travels long distances to reach markets. Low travel costs will reduce total input costs on goods and may thus increase demand, thereby allowing consumers to boost the economy with increased spending.
Also, a less discussed fear is that despite deregulating petrol and diesel prices and allowing the public oil marketing companies to call the shots, the government is unwilling to let market forces take over. Multiple excise duty hikes bear testimony to the fact that the government is making hay while the sun shines.
“This is the smoothest way to make money; you don’t mind paying the cost, because it cost you about that much anyhow [and there is a small cut in retail prices]. The government makes its money,” wrote financial analyst Deepak Shenoy. “If crude prices go up, the government can adjust the excise duty to reduce the impact. But it does bring back the fear of administered pricing – which is exactly what we are getting; for a change, we are administered higher prices.”
