There is no free lunch on car fuel prices

Petrol and diesel prices rose again on Sunday by 50 paise per liter and 55 paise per litre, respectively. This is the fifth increase in the prices of these fuels in six days, resulting in a cumulative increase per liter of 3.70 and 3.75 respectively at the level of petroleum marketing companies (OMC). The fuel pump price increase would vary from state to state depending on local sales tax or value added tax.

However, gasoline and diesel prices barely increased compared to the rise in crude oil prices. The price of India’s basket of crude oil, which was $117.7 a barrel on March 24, has risen nearly 41% since early November.

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Windfall gains

State-run MOCs are to raise petrol and diesel prices by around 22 per liter and 25 per litre, respectively, to have a normative marketing margin of 2.7 per litre, if the price per barrel of crude oil is $120, according to Hemang Khanna, analyst, Kotal Institutional Equities.

However, it would be difficult to implement such a price increase. Not only will this be politically difficult, but it would immediately fuel retail price inflation, which is already above the Reserve Bank of India’s upper tolerance level of 6%. This would thus make things difficult for a large part of the population who are struggling to counter the negative economic impact of the coronavirus epidemic.

However, if CMOs do not raise their prices to the levels recommended above, their marketing margins will be affected. Kotak estimates gasoline and diesel gross marketing margins to be in negative territory so far in March.

Excise duties and sales tax or value added tax from state governments account for the bulk of the price of gasoline and diesel throughout the country. As such, one option is for the central government to reduce excise duties on petrol and diesel to ensure that at least the MOCs do not lose money. Since October 2014, the excise duty on petrol and diesel has been 9.48 per liter and 3.56 per liter respectively. This gradually increased and from November it was 32.90 per liter and 31.80 per liter on both fuels respectively. On November 3, the excise duty was reduced to 27.90 per liter and 21.80 per litre, respectively, offering some relief to the end consumer.

The central government’s reliance on the revenue it derives from the various taxes, levies and surcharges paid by the oil sector has only increased over the years.

The oil sector’s contribution to central government includes excise duties levied on petroleum products, corporate income tax and dividends paid by oil companies to central government, tax on the distribution of dividends, customs duties, tax and royalty on crude oil. This contribution was 1.38% of gross domestic product (GDP) in FY15. In FY21, it was 2.3% of GDP. This year, it was 2.01% of GDP.

This is mainly explained by the increase in excise duties on petroleum products, which rose from 0.79% of GDP in FY15 to 1.88% in FY21. It was 1.58% in the semester ending in September (H1FY22).

The central government’s reliance on revenues from the oil sector has increased dramatically. However, if he wants to ensure that soaring oil prices do not translate into high inflation, he must reduce excise duties on gasoline and diesel. Moreover, given that the government captured most of the fall in oil prices from the end of 2014 by increasing excise duties on petrol and diesel, it is only fair that it reduce rights now.

This would result in lower tax collection. To compensate for this, he will either have to borrow more or try to make more money through non-tax means such as divestment and land sales. There is no free lunch in economy. In the end, there are perpetual compromises.

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Christy J. Olson