High fuel prices are choking the country’s consumption and economic growth

Nothing is more untrue and misleading than the official statement that the near record surge in current domestic petrol and diesel prices is linked with hardening crude oil prices in the international market. The retail prices of petrol and diesel have almost touched their peak levels reached in October, 2018. The prices were manipulated then, and now.

The domestic petrol and diesel prices have nothing to do with world oil prices. Their prices are artificially jacked up by the government’s high taxes and levies. They provide the easiest revenue source for the Central government. The current crude oil prices in the international market vary between US$47.12 per barrel for Mexican basket and $53.93 for Brent crude.

As of January 6, 2021, the global price of MARS US crude was hovering around $51.03 per barrel. The price of OPEC basket was $51.36. The average world crude oil price through the last week hovered around $50.05 per barrel. The crude oil price did appreciate by around five percent last week in anticipation that the newly discovered Covid vaccines may improve the global economic situation and raise the oil demand. Contrast the current global crude oil prices with those prevailing in the middle of 2008 when the highest recorded price reached $147.02 per barrel.

Domestic petrol and diesel prices don’t dip sharply when global crude oil prices nosedive. They didn’t drop when the global crude price temporarily crashed to $19 a barrel last year. The average closing price of crude oil was only $39.68 per barrel through 2020. Why were Indian consumers still made to pay nearly Rs.70 for a litre of petrol and Rs.62 for diesel?

On April 20, 2020, the price of West Texas Intermediate (WTI) crude oil slumped into negative for the first time in history. The ongoing coronavirus pandemic has had a catastrophic impact on the global oil and gas industry. Declining consumer demand and high levels of production threatened to exceed oil storage capacities, which resulted in the lowest ever oil prices in memory in April, 2020. Why they didn't have a visible impact on fuel prices in India, which recorded the worst economic decline of over 30 percent in the April-June, period? Prices were manipulated by taxes and levies instead of demand-supply situation in the market.

Obviously, the increase in petrol and diesel prices in India has little to do with the global crude oil price movements. Local prices are totally engineered by the government. High domestic retail prices are almost entirely due to extremely high levels of government levies. Such high domestic taxes may be good for the government, but they are choking the economy.

Suffice it to say that high fuel prices lead to high transportation costs across the board. They impact all sectors of the economy — agricultural, industrial and services. Why are government economists, who used to be extremely critical of fuel subsidy for years, are now silent on tax terror on consumers?

Sales tax and value-added tax on petroleum products also mean a huge income for state governments. In 2018-19, the total sales tax/VAT collected by states on petroleum products was Rs. 2.01 trillion, making up around 16 percent of the total Rs.12.61 trillion in tax revenue collected by state governments that year. In the first nine months of 2019-20, the total sales tax/VAT collected by state governments on petroleum products was Rs.1.44 trillion.

It is true that the global oil prices have been witnessing an increase since the arrival of Covid-19 vaccine, rekindling the hope of a return of economic normalcy and positive public sentiments around the globe. The stock markets too are partially up due to similar sentiments. However, it is difficult to digest the current atrocious behaviour of India’s retail automotive fuel market.

For instance, when crude oil prices had hit the bottom during last April due to severe restrictions on travel across the world, the petrol and diesel prices did not fall in India. A near total lockdown in India in April-May had little impact on the country’s retail fuel market. The consumers of petrol and diesel did not get the benefit of critical fall in the global crude oil prices. The reason is simple: India’s highly inflated petroleum tax structure, the single biggest source of indirect tax collection.

Almost 86 percent of India’s requirement of crude oil are met through imports. Petro-products have been deliberately kept outside the ambit of the goods and services tax. Indian industry and consumers want the key petro-products under GST. However, this is unlikely to happen in the near future as all political parties at the helm of Central and state governments are united against it. GST on petro-products will prevent their tax departments from freely tapping this sector to mop up large revenues at the cost of consumers.

Industry body Associated Chambers of Commerce (Assocham) wanted the GST to cover petrol and diesel in the greater interest of the economy. Assocham secretary general Deepak Sood says both the Central and state governments have been over-dependent on petrol and diesel for revenue. “While this over-dependence needs to be brought down, there is a strong case for a national parity for the prices of automobile fuel”, Sood said. “Otherwise, the broader objective of a single market under the GST remains unfulfilled”.

The components of taxes, levies and commissions on petrol and diesel in India cover some 60-70 percent of their retail prices at petrol pumps. This is absolutely atrocious and a major reason why India fares so poorly when it comes to its price competitiveness in the world market. It is choking the country’s consumption and economic growth.

Cheaper oil has positive impact on all macroeconomic parameters. It helps expand market and employment. The government, the single biggest consumer of petrol and diesel, will also be able to free up resources for welfare.

(IPA Service)