With crude oil prices rising, will govt roll back excise duties on petro products?

The lion’s share of the benefit from the decline in global crude oil prices has been appropriated by the government


Graphic: Subrata Jana/Mint
Graphic: Subrata Jana/Mint

The chart shows that in July 2013, when the price of the Indian basket of crude oil was Rs6,170.48 a barrel, the retail price of petrol in Delhi was Rs70.44 a litre. On 1 January 2017, with the price of the Indian basket of crude oil at Rs3,599.97 a barrel, the retail price of petrol was Rs70.60 a litre. Between July 2013 and January 2017, the price of the Indian crude oil basket fell 41.6%, while the retail price of petrol went up marginally.

In other words, the Indian consumer is now paying the same price he paid for petrol when crude oil prices were much higher.

Consider the chart alongside: the Indian basket of crude oil and retail petrol prices pretty much moved in a similar fashion till about the end of 2014. The trends have diverged sharply since then. The chart shows that the divergence started around the end of 2014: the year when the Narendra Modi-led Bharatiya Janata Party government came to power. Not without reason. The government chose to retain a portion of the benefits from falling crude oil prices by increasing excise duties.

Nitin Tiwari, an analyst at Antique Stock Broking Ltd, pointed out that after 12 November 2014, excise duty on petrol increased from Rs9.70 per litre to Rs21.10 per litre by February 2016. Similarly, excise duty on diesel has increased from Rs3.67 per litre to Rs17.33 per litre during this period. Secondly, specific product prices and related spread movements also play a key role in determining retail product prices.

Crude oil prices touched 18-month highs on Tuesday, the first day of trading in 2017. With the outlook on prices remaining firm, should the Indian consumer worry?

The fact is that the Indian consumer didn’t gain much when crude oil prices dropped, as this column has highlighted earlier as well. The lion’s share of the benefit from the decline in global crude oil prices has been appropriated by the government.

The silver lining in this story is that the government has some cushion in the form of excise duty in an environment where crude oil prices are increasing, as it can pass on those benefits to consumers.

“Should the global oil price cross a certain inflection point, which could be around $60 per barrel, the government might re-look at the excise duty levy in such a way that fuel demand is not affected by higher domestic retail prices,” says Tiwari. “Because ultimately tax collections are a combination of both sales volume as well as tax levy.”

But will the government heed that advice?

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