When the government introduced dynamic pricing for retail petroleum products on June 16 this year—under which domestic fuel prices would change daily, in tandem with international rates—there was little protest, if any, from the public. Today, however, with fuel prices having soared to three year highs, massive protests have erupted both on social media and on the ground.
The reason—and background—for this is complicated. To begin with, dynamic pricing was introduced as a natural progression of India’s shift toward deregulated fuel prices. Petrol prices were first deregulated in 2010 (and diesel in 2014), though rates were then revised only on a fortnightly basis. This took place against a backdrop of massive fluctuations in the price of crude oil—for instance, from a high of $120 per barrel in January 2012, crude prices dropped to as low as $45 per barrel in June this year. This decrease seemed an ideal opportunity for the government to introduce dynamic pricing.
What irks many is that despite the substantial drop in international prices since the Modi government came to power in 2014, consumer fuel prices have remained roughly the same. Put it this way: on March 1, 2014, two months before the Modi government came to power,
crude oil was trading at $108.7 per barrel, and petrol was priced at Rs 73.2 per litre in Delhi. On September 25 this year, despite crude oil costing about $57 per barrel, petrol was priced at Rs 70.4 per litre in Delhi.
Complicating the matter is the fact that taxes, including Central excise duty and state VAT, make up more than half of consumer fuel prices—and taxes have been rising. In April 2014, excise duty on petrol was Rs 9.5 a litre. On September 15 this year, that number had more than doubled, to Rs 21.5 a litre. The fact that excise duty has been hiked multiple times to reach its present level illustrates how taxes on fuel are a preferred revenue source for the government. Speaking on the issue, oil minister Dharmendra Pradhan said that fuel prices would soon cool off, blaming the current high costs on hurricanes Harvey and Irma striking the US and significantly decreasing global oil-refining capacities. However, the data does not back up his assertion. On August 15, before either hurricane Harvey or Irma had even formed, the price of petrol in Delhi was Rs 68.1 per litre, and had risen by Rs 4.2 per litre in the previous month. In contrast, on September 15, the price of petrol in Delhi was Rs 70.4 per litre, and rose only Rs 2.3 per litre during the month that Harvey and Irma ravaged the US. For context, India consumed 1,798 million barrels of crude in fiscal 2016-17, 85 per cent of which was imported from countries like Saudi Arabia, Iran, Iraq, Nigeria, Venezuela and the UAE.
Experts say that the Central and state governments need to lower taxes to bring fuel prices down. “We have now reached a threshold as far as fuel prices are concerned, and the government has to take a call (on revising the duties),” says K. Ravichandran, senior vice president with ratings agency ICRA. This would mean that the government has to give up a percentage of revenue generated from taxing fuel. Further complicating matters is the fact that fuel was left out of the ambit of the Goods and Services Tax (GST), which came into force on July 1 this year. This gives the states some fiscal independence via VAT on fuel and also explains why fuel prices vary from state to state. Pradhan has hinted that a solution to rein in high fuel prices might involve bringing fuel under GST.
High fuel prices can produce inflationary effects, and could prevent the central bank from reducing interest rates in October. They can upset India’s trade balance too, which is currently skewed towards imports. Energy expert Kirit Parikh says the revenues from high taxes on fuel should be used in social welfare schemes directed at education and healthcare, and to fund R&D. That is a sound argument, but it does little to explain to irate consumers why fuel prices are so high to begin with.
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