How the Centre is using oil price decline to reset expectations and boost revenues4 min read . Updated: 17 Jun 2020, 06:32 AM IST
Historically, the Centre has been defensive about oil. Now, it’s using the crash in oil prices to reset prices and expectations—and chase revenues aggressively
Historically, that’s how the Union government’s relationship with fuel has been.
On the one hand, the Centre wanted India to consume big, as it meant the economic engines were moving. On the other, this big consumption ended up raising tricky macro-economic challenges, with oil imports widening the current account deficit and oil subsidies adding to the fiscal deficit.
As oil prices cooled over the past few years, that relationship has been changing. Now, the relationship may be undergoing a complete reset thanks to the domino effect of this pandemic. With prices of crude oil and petroleum products (the raw rather than the finished products) crashing, the Centre no longer needs to worry about oil prices widening the twin deficits (fiscal and current account). Instead, oil has become a lucrative revenue stream for the Centre. And it is playing all its cards to maximize oil-linked revenues, even if it means squeezing consumers and states.
The first card was prices. On February 21, a barrel of Brent crude oil, the benchmark for Indian producers, was around $59. As the world locked down and consumption evaporated, Brent plunged to $9 on April 21—a steep drop of 85%. As a result, India’s oil imports in April fell 12% in volume terms and 63% in value terms. But consumers barely benefitted. Between February 21 and April 21, the price of petrol in Delhi dropped just 3%. Brent has since recovered to $40. And the price of petrol in Delhi has increased by about 8% in the past week.
At the moment, Indian consumers are currently paying more for petrol than they would under a pricing structure that was completely market linked. This is the first time they are doing so since India shifted to daily revision of prices in June 2017.
According to the International Energy Agency (IEA), an intergovernmental organization, Indian consumers currently pay significantly more for petrol than other emerging markets. Petrol costs $1.08 per litre in India, against $0.45 in Indonesia, $0.85 in Vietnam and $0.9 in Thailand. At this point, a cut in prices seems unlikely.
The Centre’s second card is taxes. Even with the fall in price, the Centre made sure it received the big chunk of revenues that it always does from oil. In January 2020, it was charging an excise duty of ₹19.98 per litre. This is now ₹32.98. Effectively, it took the gains from a lower base price as additional excise.
At this point, the Centre needs all the revenues it can get. The pandemic has dented all its revenue streams, while adding new expenditure and future liabilities. About 20% of the Centre’s tax revenues come from various taxes on fuel, with the big one being excise.
States are in a similar situation. In recent years, even states have earned 18-20% of their tax revenues from fuel products. Moreover, these revenues are outside the ambit of the Goods and Services Tax (GST), and don’t have to be shared with the Centre.
This dual, and high, taxation makes fuel one of the most-heavily taxed items in the economy. According to BPCL (Bharat Petroleum Corporation Limited), in Delhi, on June 7, the price of petrol was ₹71.86 per litre. Of this, ₹32.98 went to the Centre as excise and ₹16.58 went to the Delhi government as value-added tax (VAT). In other words, taxes amounted to nearly 69% of the price.
The Centre’s lead on prices and taxes has meant that states have relatively lesser room to tax consumers more without hurting demand. States can increase VAT on fuel, as most have done during the lockdown. But on average, the increase by states has been lower than the hike in excise duties by the Centre. Still, it should boost their tax revenues. Most states earn between 10% and 20% of their tax revenues from fuel taxes.
Consumption of fuel products have already taken a severe hit. In April, overall consumption fell 46%, compared to April 2019, according to data from the government’s Petroleum Planning & Analysis Cell. May was better, with the year-on-year drop at 23%. Both the Centre and states are staring at a revenue shortfall from fuel taxes. Increasing tax rates is one way to make up.
With the usual hue and cry around rising fuel prices missing, a reset seems to be underway. Although the principal opposition party, the Congress, is attempting to mobilize public opinion on this issue, it remains to be seen how far this issue gains traction.
Beyond a point, fuel is a discretionary spend, and environmentally harmful, making high taxes on it politically acceptable. The Centre has grabbed this pricing power. It’s a full circle from the time it was unable to revise prices when crude oil prices were increasing, leading to high oil subsidies.
Now, it is using fuel prices to raise revenues. Till the time global oil prices stay subdued, this reset could stick. But if oil prices soar again, this reset will be tested.
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