The hike in price of diesel to a record Rs 61.74 per litre [Delhi] and petrol to a three year peak of Rs 71.18 per litre [Delhi] is a warning signal that the honeymoon period that India enjoyed for about three-and-a-half year beginning June 2014 may have come to an end.
The prices of diesel and petrol broadly follow the movement in the international price of crude oil which India imports to meet around 82% of its requirements. The international price of crude oil declined from the peak of US$ 117 per barrel in June 2014 to a low of US$ 27 per barrel in February, 2016. During 2016, it increased slightly but still kept low at around US$ 40 per barrel till the end. During 2017, it increased sharply and is currently ruling at about US$ 70 per barrel.
The steep increase during the last one year is in response to the decision of the Organization for Petroleum Exporting Countries [OPEC] – a cartel of oil exporting nations from the middle – east to reduce their combined output by about 1.2 million barrels a day as also by 11 non-OPEC countries led by Russia knock off over 500,000 barrels w.e.f. from January 1, 2017.
The producers’ determination to continue with the supply cut despite recent price surge, along with healthy demand for oil amid strong global economic growth points towards the price continuing to escalate during 2018 and perhaps, even beyond.
Falling oil prices during the last few years came as a great help to the government in reducing import bill, slashing current account deficit, increasing tax revenue, reducing subsidy, reining in fiscal deficit, lowering interest rate and above all decrease in inflation resulting in benefits to all sections of society particularly poor.
This also helped Modi – dispensation in garnering resources for funding massive capital spend on building infrastructure viz. physical: highways, roads [including rural roads], rails, ports, airport, waterways etc and social: houses, hospitals, schools/colleges, toilets, IITs, medical institutions/colleges etc. These are pre-requisite for laying the foundation for accelerated growth in long-run.
The government – led investment has also been largely responsible for maintaining the momentum of growth during the last three years at a time when investment in private sector has been sluggish; courtesy, hugely, leveraged balance sheet of most corporate and slow down in credit growth by banks.
Now, with price moving north-ward, these benefits will get lost; not only there could be a set-back to growth and increase in fiscal deficit, there is a real possibility of the economy plunging into a state of crisis. The government should prepare itself to cushion against increase in the international price of oil.
First, central excise duty [CED] and VAT [value added tax] alone account for nearly 50% of the retail price. At present, CED on petrol is Rs 19.5 per liter which includes hike of Rs 10.5 per liter when international oil price was declining [mid-2014 to January 2016]. Likewise, CED on diesel is Rs 15.3 per liter including Rs 12.0 per liter hike affected during the period. There is a strong case for reducing both ED and VAT. Indeed, this is the time to give back to consumers what was taken away when going was good.
At the time of launch of Goods and Services Tax [GST], five oil and gas products viz. petrol, diesel, crude oil, natural gas and ATF [aviation turbine fuel] though included were kept zero rated which effectively meant their exclusion. This was in deference to states wishes who were levying VAT as high as 27%/17% [petrol/diesel] and hence in no mood to let this golden goose go away. There is an urgent need to include these with GST rate of no more than 18%.
True, there will be loss of revenue but, this can be more than offset by gain from effective implementation of GST and reining in evasion via measures such as e-way bill and matching of sale and purchase returns etc. The government also needs to tap the mountain of unaccounted cash coming to banks post – demonetization. According to KV Kamath, President, New Development Bank [NDB] of BRICS countries, it should be possible to garner about Rs 250,000 crores.
Second, at present, downstream oil PSUs viz. Indian Oil Corporation [IOCL], Bharat Petroleum Corporation [BPCL] and Hindustan Petroleum Corporation [HPCL] determine retail prices by adding their marketing margin, dealers’ commission and taxes and duties to refinery- gate prices [RGP]. RGP in turn, is linked to international prices of petrol and diesel which is taken as import parity price [IPP] and export parity price [EPP] of respective products in the ratio of 90:10.
Since, import of petrol and diesel attract higher customs duty @ 2.5% against ‘nil’ on import of crude oil, this results in artificial boost to the price realization of oil companies as duty is included in computation of IPP. This apart, there is an inherent advantage due to higher shipment cost and port handling charges on refined products. This anomaly can be removed if only RGP is linked to 100% EPP.
Third, 90% of fuel retail market is controlled by oil PSUs. In this backdrop, de-regulation of prices of petrol and diesel does not serve the intended purpose of giving relief to consumers as they continue to fix margins, commission, freight cost as per their choice. The monopoly also enables these undertakings to continue with present flawed mechanism of fixing RGP leading to higher retail price.
Fourth, the present policy of routing subsidy on LPG and kerosene through oil PSUs is also working to stifle competition.
The government should open retail marketing to private participation including foreign investors and give subsidy [albeit on LPG and kerosene] directly to the consumers. In other words, the beneficiaries should receive money directly from union government [instead of routing through oil PSUs] and have the freedom to buy the product from retailer of his/her choice.
These measures together with inclusion of all oil products under GST in 18% slab will enable the sector acquire the much needed ‘robustness’ and ‘resilience’ to deal with impending oil shock.