An increase in international crude oil prices, triggered by production cuts by major oil-producing countries, has led to a sharp rise in petrol and diesel rates in India over the past few months, so much that Indian citizens are paying north of 100 rupees for a litre of petrol. This has sparked unrest among the public, especially the lower-middle classes, for whom rising fuel prices is a burden on income and savings
Oil as a major source of revenue
Historically, prices of petrol and diesel were regulated by the government, which paid subsidies to oil marketing companies which shielded consumers against turmoil in the international oil market, but in 2010, this process of fixing petrol prices was abolished with the prices being directly linked to the global markets, diesel followed the same steps in 2014. But this deregulation is only for the namesake, as this has become a one-way street, whenever the global prices go up, they are reflected by the increase in oil prices at home, while if the prices see a downward trend, the prices are hiked up by taxes by state and central government, so in all fairness, when we were supposed to benefit from lowering of any dip in the oil prices, we have to actually pay the same amount or an amount even higher than before.
Since 2014 the oil prices were revised every fortnight, but on 16th June 2017, the revision of prices is being done on a daily basis in order to safeguard the consumers from any kind of fluctuations or any kind of stress. As decontrolled pricing happens, the oil companies in order to increase their profit margins, did not allow any kind of benefit passed on to the end consumer of any lowering of global oil prices.
Oil remains one of the biggest sources of revenues for the centre and state governments. Even when the long-awaited Goods and Service Tax (GST) was announced in India, majorly 5 petroleum products (viz. petroleum crude, motor spirit (petrol), high speed diesel, natural gas and aviation turbine fuel) were kept out of the purview of this new tax.
The problem started when the coronavirus first hit India in March 2020, the subsequent lockdowns and complete restrictions on businesses, travels and transport of any kind was stopped, resulting in a complete stand still of any activities that involved utilisation of petrol and diesel. As the movement of all the activities around the world stopped, the global prices of crude oil crashed and it plummeted to such an extent that the prices were not revised for 82 days.
Causes & Effects
• Global Crude Oil prices: The Global oil price depends on a lot of different things viz. the international pricing of crude oil, freight charges, the exchange rate, etc. which in turn, also affect the prices of oil in India.
• Post pandemic effects: This is a major factor in the drastic changes in oil prices in the past year. Factories, Air travel and private transport were given green light, because of which there was a sudden surge in demand of oil in the global market. The OPEC countries, in order to control the value of oil in the market are putting a cap on the overall extraction of oil resulting in an increase in the oil prices from as low as $19/barrel in may 2020 to $60/ barrel today.
• Taxes: The major reason that the price of petrol and diesel is on the same level as that of developed countries is the taxation – the Excise duty levied on the oil is charged by the Central government as a revenue, while VAT is charged by the state governments as per their discretion, which is evident by the different rates of petrol and diesel in many cities in India. These taxes apart from dealer commission and freight charges account for 63% of the total price we pay for petrol and it amounts to 52% in case of diesel.
• Hike in Excise duty: Because of the hiking of excise duty, consumers were not able to utilize any savings that would have occurred to them due to fall in oil prices during the lockdown, while after the lockdown, the prices are on the rise since November.
• Negative margins for oil marketing companies: The companies claim that if they revise their pricing according to global oil price crash, they would have huge negative margins, which would bleed them dry.
• Inflationary impact: Rise in oil prices is not only limited to the end customer but has an overall inflationary impact on many businesses and different sectors.
Challenges
• The GST constraint: GST leaves very little space for the government, state or central to manoeuvre its taxation system, because of which taxation of oil has become the most lucrative revenue generation platform for the central and state government. As a result, in case of hike in prices of oil in global markets, the eventual negative impact of this will be passed on to the customer, while in case of any downfall in prices, the governments will try to tap benefits from it by raking up its revenue by putting more and more taxes on it, with customers being ended upon the losing side on both the cases.
• Lack of infrastructure storage: The lack of oil storage infrastructure requires India to buy the oil even when the prices soar. If India had proper crude oil storage infrastructure, it could have benefitted from the significant price decrease during the lockdown.
• Overt dependence on fossil fuels: India is hugely dependent on fossil fuels for its energy demands, Apart from coal, India relies heavily on petrol and diesel and 85% of which is imported and as a result, any fluctuation in global oil prices affects India drastically.
Way Forward
• Pragmatic taxation system: A taxation policy which would be beneficial to the citizens in case of such a pandemic situation, which could maximize from the good times while providing benefits in tough situations.
• Energy Security: With Joe Biden in the US Office, India could renew its relations with Iran both strategically and on supply of oil. In the past, Iran has been the biggest supplier of oil to India. Oil from Iran and Venezuela is cheaper, but both countries have been sanctioned by the United States. India needs to work around these sanctions to reduce cost on its oil imports.
• Implementation of Electronic Vehicle scheme: India needs a strong EV scheme, there have been many steps taken in the past but none have made any concrete changes in the way we use petrol and diesel vehicles.
THE ECONOMICS CLUB IMI 