Understanding Rising Fuel Prices in India

If our eminent intellectuals and politicians have taught us anything, it is that one can have opinions on anything.

Introduction

In this article, I shall look into the rising fuel prices and provide some rationale for the same. As mentioned above, I am no expert and my view can be considered amateurish at best.        

Who is to be blamed for the rising fuel prices

While people can debate whether 60% of the total taxes collected goes to the Center or States, it is quite evident that the blame for the rising prices should go to both. And seeing that the GST Council (in which only 33% of Voting Rights rests with Center) is not interested to take fuel into the ambit of GST, since that is one area along with Alocohol where states have the freedom to tinker taxes, it becomes fairly obvious that both Center and the respective state Governments are to be blamed for the same.

How have the fuel prices increased over the long term

I was able to source the below prices for Delhi over the past 18 years from Mycarhelpline.com. Basis the same, we can understand the following:

  1. During the UPA regime (2004 to 2014), average inflation of petrol prices was 7.3% every year while it was 9.3% for diesel. 
  2. While during the NDA regime (2014 to present) the average inflation of petrol prices is 4.7% for petrol and it is 7.0% for diesel.
  3. The increase in fuel prices during the UPA regime was mainly on account of increase in global oil prices while during the NDA regime it was mainly on account of increase in taxes and deregulation of diesel in 2014. On the other hand, the current increase in prices is on account on both rising oil prices and increase in taxes. 
  4. One can argue that what matters is the final price irrespective of what is happening in the global market. If one takes that into consideration, the inflation in fuel prices during the NDA regime has been more beneficial to end consumers compared to the UPA regime.
   


The current year on year inflation rates of Fuel and Light for the month of May 2021 is 10% and for June 2021 is 12%. While this is obviously high, we also need to take into account the fact that our overall inflation from 2008 and onwards has been hovering around 10% while the overall inflation even now is only in the range of 6%.

Before we move forward, I would like to point out  a hypocrisy among both the supporters and critics of the Government with an example. If the price of say onions go up due to some natural disasters, I think the critics of the Government will blame them because at that point what matters is the price in the hands of the consumer. While for the fuel prices, they will still blame the Government because the global prices are lower though final price is beneficial to the consumer (as mentioned above). This is a  heads I win, tails you lose kind of thing. On the other hand, the supporters would do the exact opposite.

Understanding the rationale (excluding the obvious COVID-19 impact on Government finances)

    The Government mainly earns revenue from indirect taxes (includes excise duties and GST) and direct taxes (personal and corporate). We shall look into each one of the below:

    GST 

    The Subramanian committee in 2015 recommended that the revenue neutral rate for GST should be around 15.3%. Revenue neutral rate is basically the average rate of GST at which the Government would get same revenues as the pre-GST period. I was able to source the table below from an EGrow Working Paper on GST. Basis the same, we can understand the following:

    1. The weighted average GST rate reduced gradually to 11.6% by December 2018. This reduction in GST rates would have benefitted all the people (rich and poor) and corporates alike since it is paid by everyone. 
    2. The GST collections was INR 12.2 lac crore for the year FY19-20. Instead of 11.6% if the GST rate had been 15.3%, the GST collections would have been almost INR 3.9 Lac crore higher. Assuming 50% share of revenue to Central Government, the loss to the Center due to lower GST rates alone would be INR 1.9 Lac crore.
    3. As a side note, I believe that one of the reasons our inflation hovered around 3.5% in FY2017-18 and FY2018-19 is mainly on account of this reduction in the weighted average GST rates during this period.      

     

    Direct taxes

    1. Due to new tax regime for corporate tax rates in September 2019, the Government had estimated revenue loss of INR 1.45 Lac crore. 
    2. Due to the new tax regime for individuals introduced in the 2020 Budget, the Government had estimated revenue loss of INR 40,000 crore.

    Overall revenue loss to Center

      1. Due to the shift to GST and the reduction in the weighted average rates as mentioned above, the revenue loss to the Centre is INR 1.9 Lac crore.
      2. Due to new tax regime for corporates and individuals, the overall revenue loss to the Centre is INR 1.9 Lac crore. 
      3. Overall, loss of revenue considering both the above points is almost INR 3.8 Lac crore.
      4. In the year FY20-21, the increase in revenue due to Excise & Services (of which a major component would be fuel taxes) is INR 1.4 Lac crore.
      5. Considering all the above, the net revenue loss to the Center is still INR 2.5 Lac crore. These calculations do not factor in loss of revenue due to COVID.         



       
      Oil bonds

          As per a Financial Express article: Oil bonds were issued in lieu of cash subsidy to oil marketing companies (OMCs) in former Prime Minister Manmohan Singh’s UPA era, and also Atal Bihari Vajpayee’s NDA rule. These sovereign oil bonds, issued in favour of oil companies Indian Oil Corp, HPCL and BPCL, were transferable, allowing these companies to raise immediate cash at the time. The government, being the issuer, would bear the interest payments and redemption at maturity. During that time, OMCs were selling fuel at lower than international market prices to keep it affordable. The government compensated those companies for it.

          Additionally, the Center is liable to pay INR 20,000 crore in FY21-22 for the bond repayment and interest on outstanding bonds and the total debt obligation for the next 6 years is INR 1.3 Lac crore.

            Conclusion and Recommendation

            From the points mentioned above, we can understand that the increase in taxes on fuel and consequently the rising fuel prices is: 

            1. To partially compensate the loss of revenue due to GST, new tax regimes for direct taxes and COVID
            2. For raising money for bond repayments
            Recently, Financial Times has reported an analysis by ICRA which basically says that Center can realize tax revenues from fuel at FY20-21 levels in the current fiscal even if they cut the prices by INR 4.5 per litre. This is a very valid recommendation which the Center should try and implement. This would also help in keeping the inflation under check since it has been slightly above 6% (the upper limit of Monetary Policy Committee target) for May and June 2021.    

            Sources

            https://egrowfoundation.org/site/assets/files/1360/egrow_wp_no_04_2020.pdf

            https://www.prsindia.org/sites/default/files/bill_files/Subramanian_Committee_Report_Summary-_RNR_for_GST.pdf

            https://www.mycarhelpline.com/index.php?option=com_easyblog&view=entry&id=808&Itemid=91

            http://mospi.nic.in/sites/default/files/press_release/CPI%20Press%20Release%20May2021.pdf

            http://mospi.nic.in/sites/default/files/press_release/CPI_Press_Release_12july21.pdf

            https://www.businesstoday.in/latest/economy-politics/story/corporate-tax-cut-to-cost-govt-rs-1-45-lakh-crore-227662-2019-09-20

            https://www.businesstoday.in/latest/economy-politics/story/corporate-tax-cut-to-cost-govt-rs-1-45-lakh-crore-227662-2019-09-20

            https://www.businesstoday.in/business/news/story/rs-40000-cr-revenue-foregone-an-approximate-calculation-as-no-clarity-which-taxpayers-will-opt-for-new-tax-regime-fm-sitharaman-249290-2020-02-02

            https://www.financialexpress.com/economy/why-govt-is-not-cutting-petrol-diesel-prices-rs-1-3-lakh-crore-oil-bond-repayments-due-for-cheap-fuel-in-past/2287253/

            https://www.financialexpress.com/market/commodities/petrol-diesel-price-rise-room-to-cut-auto-fuel-taxes-by-rs-4-50-litre-says-icra/2278693/

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