Petrol and Diesel Pricing – Issues in News

This article talks about the issue of petrol and diesel pricing in India. This is a topic that is grabbing headlines in India right now with the issue becoming a political affair as well. In this article, we discuss the pricing of fuel such as petrol and diesel, impact of the rise and fall of their prices and the way forward as far as this issue is concerned. This topic is extremely important in Economy for the IAS exam.

Indian situation

  • India is the 3rd largest oil consumer in the world
  • India imports more 80% of its requirement of crude and of that more than 60% of its needs from OPEC
  • Recently Iraq has become the largest exporter of Oil to India followed by Saudi Arabia, Iran and Kuwait, Venezuela, Nigeria etc
  • Oil and Iran
    • India purchases 10% of its requirement from Iran
    • It is also 3rd largest supplier to India
    • It provides credit of 60 days
    • Iran supplies 2.4 MN barrels per day of crude to the international market
  • The value of import bill for oil increased by 76% in July from a year earlier to $10.2 bn, which pushed up the trade deficit to more than $18 bn (the highest in five years). The increasing crude oil prices will ensure that the CAD will reach 2.6% of GDP in this financial year from 1.5% a year ago
  • Pricing/Financials
    • ATF prices were deregulated in 2002, Petrol prices were deregulated in 2010 and diesel prices were deregulated in 2014. The present government has implemented the dynamic pricing
    • Under GST
      • LPG
      • Naptha
      • Furnace Oil
      • Light Diesel
    • Out of the ambit of GST
      • Crude oil
      • High Speed Diesel
      • Petrol (Motor Spirit)
      • Natural Gas
      • Aviation Turbine Fuel
    • The government incurs subsidy costs as not all the fuel products are linked to market rates. Components such as kerosene and LPG still are provided with subsidy. For this financial year the govt has allocated ₹ 24932 Cr. the crashing rupee value will increase the subsidy burden of the government.

Why the prices have increased/Causes

  • Variation in supply
  • Stronger dollar
  • Import dependent
  • Sanctions on Iran

Issues / Impact

  • Will lead to higher CAD – the higher crude oil prices will make
    • Imports costlier
    • Indian exports will become costlier in international market thereby increasing the trade deficit as well as CAD
    • Dollar outflows will further lead to CAD
  • Domestic inflation
  • RBI may increase the interest rates
  • Impact on the finances of the Government – the government subsidy bill will increase, the FD will increase, the cost of borrowing will also increase
  • Effect the households – the expenditure on fuel consumption will increase, food/vegetables in the market will cost more, transportation expenditure will increase etc
  • May affect industrial growth – the cost of inputs are going to increase and since these are important raw materials, it will have a limiting impact on the growth
  • Affect growth – CAD, FD increase will affect the growth prospects
  • The higher inflation will push up the borrowing costs of the government
  • Political Costs – the opposition parties have hammered the government targeting this issue. The price of petrol in Delhi in 2014 was around ₹ 52 and today has crossed ₹ 72. On the face of it the difference is too large but adjusted with inflation the differential will be marginal, but for the price sensitive common man in India, this difference is too big a burden and represents failure on the part of the government of the present day.

Criticism

  • The government has increased the excise duties nine times since 2014
  • The taxes on the petrol by the central govt has been increased by 126% presently the excise duty imposed by the govt is ₹ 19.48
  • The taxes on the Diesel by the central govt has been increased by 330%
  • The govt collected excise worth ₹ 77000 Cr in 2013 and ₹ 2.4 lakh Cr in FY18
  • The govt has been using this to provide recapitalisation package to banks, subsidize the air India etc

Way out

  • Increase the imports of shale oil
  • Reduce the taxes – Assocham recently has stated that the reduction in taxes is the only way to control the prices. Having said so, the taxes on petrol and diesel have been the golden goose for the government (centre and state)
    • Between Nov 2014 to Jan 2016 the government has increased the excise duty of petrol by 11.77 per litre, diesel-13.47 per litre. Between 2014 to 2017 the government’s excise duties on petrol and diesel increased from 0.44% to 1.44% and FD reduced from 4.5% to 3.5%
    • A ₹ 2 cut in taxes will lead to a shortfall of ₹ 13000 Cr revenues and increase the FD by 0.1% of GDP
    • 45 to 55% by states and centre – if it is brought under the GST, there will be huge shortfall
    • The taxes collected has increased from 3.3 lakh Cr to 5.5 lakh Cr (between 2014 to 2018) which has been used up (social expenditure has been over ₹ 10 lakh Cr in the last five years)
    • Who is in a better position to cut taxes – centre or states?
      • The centre imposes duties based on per litre whereas the states impose ad valorem tax which increases the earning of the states as the prices increases. Hence the state government is in a better position to cut down the taxes rather than centre. Having said so the states have argued against this as the introduction of GST has already dealt a blow to the earnings of the states and the states have a fiscal deficit issue to take care of
      • Between 2004 to 2008 the same thing happened and the government in order to provide cushion to the consumers (subsidy) issued oil bonds, this led to erratic financials for the government
  • Bring it under GST
    • States made revenues of over ₹ 3 lakh Cr in the form of taxes on petrol and diesel
    • If it is brought under GST, then the rate has to be much higher than 28% which is not feasible
    • GST on petrol and diesel (21 Jun 18)
      • GST applicable will be 28% and above this states will be allowed to impose local taxes
      • If done then the central government will have to decide if it is ready to let go ₹ 20000 Cr input tax credit which it pockets now
      • No pure GST rather it will be a combination of GST and VAT
  • Reduce the dependence
    • India has proposed Oil Buyer’s club. This would be a grouping of India, China, Japan and South Korea. The objective is to reduce the dependence on OPEC, have better bargains, increase the imports of crude oil imports from USA etc
    • It was put forward by Mani Shankar Ayyar in in 2005
  • Create a stabilization fund or reserve account – Thailand, UK etc

More Issues in News.

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