As the country braces for a gruelling election season, the Opposition called for a ‘Bharat Bandh’ on September 10 to pressure the government over rising prices at petrol pumps.
Oil prices at home are the result of global prices and central and state taxes levied domestically. There has been extraordinary turbulence in these areas. World oil prices had reached a peak of $112 a barrel in 2014, before they began a precipitate fall, reaching below $30 in February 2016. This was due to a worldwide economic downturn and increased US production due to the shale revolution, both of which led to an over-supplied market.
Principal world producers did not correct the market imbalance, focusing instead on retaining their market share and hoping that the low prices would make US production uneconomical. However, prices continued to fall, since US production weathered the low prices.
This finally compelled members of the Organisation of Petroleum-Exporting Countries (OPEC), led by Saudi Arabia, in late 2016, to work with major non-OPEC members, particularly Russia, to curtail production. Since early this year, oil prices have been going up steadily and have now stabilised at just over $75 a barrel.
The Indian government saw in the fall in oil prices an opportunity to correct the current account deficit by raising the excise duty on petrol, rather than pass on the benefit of low prices to the consumer. Thus, during the period of low oil prices (November 2014-January 2016), the government raised excise duty on petrol nine times, going from Rs 9.48 a litre to Rs 21.48, an increase of 226 per cent; excise duty on diesel went from Rs 3.56 to Rs 17.33, an increase of 486 per cent.
This approach makes economic sense. Central and state taxes on petrol and diesel add over 90 per cent to the dealer price of oil, but they are also a principal source of government revenue—excise duty provided Rs 2.29 lakh crore to central revenues in 2017-18 and constituted 23 per cent of total tax revenues.
Calls for reduction in excise duty are unrealistic. A reduction of Rs 2 will entail a huge loss to the national exchequer.
State governments levy VAT on petrol and diesel. This is a major source of government revenues, totalling Rs 1.84 lakh crore last year. Maharashtra collected Rs 25,500 crore, Tamil Nadu Rs 15,500 crore, Gujarat Rs 14,500 crore and Karnataka Rs 13,300 crore.
As global oil prices have started rising, vehicle owners in India have begun to feel the pain of high prices at the petrol pump—over Rs 87 a litre in Mumbai and Rs 80 in Delhi. The fall in rupee value, about 10 per cent in just the past two months, has made import of oil even more expensive.
But, calls for reductions in excise duty are unrealistic: a reduction of just Rs 2 will entail a loss of Rs 28,000-Rs 30,000 crore to the national exchequer. However, short-term electoral considerations could trump economic prudence.
The outlook for global prices remains very uncertain, primarily due to the US commitment to push all Iranian oil exports out of the market. This could be balanced by a possible reduced world energy demand on account of US-led trade wars and the decision of the Trump administration to sell about 11 million barrels of oil from its strategic reserve in October-November, just when the sanctions on Iranian oil begin to take effect.
However, analysts believe that the sanctions could push prices to over $100. With India poised to overtake China in terms of oil demand and account for 30 per cent of the growth in global demand for oil by 2024, pressures on the government and the consumers will only get exacerbated.
(The author is a former ambassador to Saudi Arabia)