Fuel Prices Hike – Full Blown All Out Political War


(Brig (retd) GB Reddi)

Modi Government has failed to reign in fuel prices hike over the past 10 days.  In no way, Modi government can justify the continuing price hike.

Earlier Modi realizes that he is offering a “Golden Opportunity” to opposition parties to launch all out political offensive through “Hartals/Rail and Road Roko” agitations, the better it is for Modi led BJP to keep its “Vote Banks” intact in all States.

Fuel prices hike is hurting the common man.  An astute politician like Modi must realize it and direct the concerned Ministry to halt the daily escalation of fuel prices.

No wonder. Ashok Gehlot, the Chief Minister of Rajasthan, is already on a war path. Digvijay Singh in Madhya Pradesh has joined the chorus against fuel price hike.

Petrol and diesel prices undergo daily revisions under dynamic pricing mechanism in place since 2017. Before that OMCs used to revise prices fortnightly.

Be that as it may, Modi should not underestimate the intellect of common man, particularly the middle class. They are well conversant with the international prices of crude, refining costs, transportation by pipeline, rail and trucks, Dealers commission, Vat, Taxes by both the Central and State Governments.

Fact 1: Latest Crude oil prices per barrel (158.76 liters) include by sources – WTI Crude $61.3; Brent Crude $64.37; Opec Basket $62.48; and so on. Say average crude oil costs $64 or (Rs.4650.00 today’s rate) per barrel. If so, cost per liter in Rupees is just around Rs.40.00 only.

Fact 2: Refining Cost is 52 paise per liter, that is, insignificant.

Fact 3: Pipeline transportation cost is about $5 per barrel; $10-$15 a barrel for rail and $20 a barrel by truck. Assuming the highest cost of $25 by all three means (Rs.1800.00 per barrel) or Rs.11.00 per liter.

Fact 4: Dealer Commission – different for petrol and diesel and varies a little with the location of fuel pumps, ranging from Rs 2-4/liter. In Delhi, the dealer commission is Rs 3.57 a liter for petrol, while on diesel it is Rs 2.51.

Adding the above costs, the cost per liter generally is say around Rs.55 per liter.

Thus, the additional burden on the common man is due to taxes: 1) Central Excise Duty – petrol Rs 32.98 per liter and diesel Rs 31.83 a liter; 2) VAT varies from State to State – Madhya Pradesh, Kerala, Rajasthan, Karnataka levying over 30 per cent VAT — the highest among states.

The prices of the fuel varies across the country as states and Union Territories levy their own rate of VAT (value added tax).

Union Finance Minister Nirmala Sitharaman, in her Budget speech, had announced the imposition of Agriculture Infrastructure and Development Cess (AIDC) amounting to Rs 2.5 per liter on petrol and Rs 4 per liter on diesel purportedly to boost farm infrastructure.

India has highest taxation rate of around 69% whereas in USA it is only 19%.

Why impose the burden on the consumer? In no way, one can justify doubling of the retail cost and imposing the burden on the Aam Admi.

The rest of the burden imposed is on account of Central and state government taxes. And, the reason for such high variation in Hyderabad is due to high State government taxes.

When there was deep decline in international oil prices, there was no automatic reduction in domestic oil prices.

In retrospect, the ‘common justification’ given includes: ‘Oil Companies’ are running at a loss due to under recoveries; “Weak Rupee”; domestic prices move in tandem with international oil prices; heavy burden of subsidies which is unsustainable for the exchequer; and so on.

In reality, successive ruling regimes have been bluffing and fooling the people not only justifying hike of various products of oil prices but also justifying hike in rates of all public utilities particularly passenger and freight services and its fallout – inflation.

Sooner Modi and political leadership realizes that airlines, railways, road transport corporations, private transport agencies, all types of freight services, autos, taxis, tractors, bore well operators and so on automatically increase prices of their products based on prices of petroleum products at international levels.

In sum, high tax recoveries both at the Central and State Governments are the root cause of high prices of petroleum products. Also, the middle classes no more will bear the burden on account of government claims of subsidies and welfare freebies.

Yet another significant issue is whether the government is actually running a deficit vis-a-vis the petroleum sector. A macroeconomic view of the petroleum sector gives us an exactly opposite picture. Surya P. Sethi, former energy adviser to the Planning Commission, estimated the contribution of this sector through taxes to the central as well as the state governments and contrasted it with the total subsidies provided by the government.

Comprehensive studies carried out by experts highlight that the tax contribution of the petroleum sector is higher than the subsidies provided by the government, inclusive of the so-called under-recoveries.

Next, it is often quoted that the oil companies are incurring losses due to the governmental regulation due to under-recoveries. Under recoveries is also a controversial issue. The difference between the cost price and the realized price represents the under-recoveries of the oil marketing companies (OMCs). The realized price is the post-tax price.

Given the above realities, Modi must act and reduce the Central Excise tax burden and appeal to the State governments to reduce correspondingly the VAT burden. As the Prime Minister, Modi must take a decisive step to reduce Central Excise tax burden to pre 31 December 2020 levels. Such a step would certainly earn the ruling regimes tremendous amount of goodwill.

If the State Governments do not follow the Central Government decision to reduce the VAT burden, then the blame for higher fuel prices will rest on the State Governments.

Finally, the key issue is the imperative to reduce the burden on the common man, particularly the middle class. If Modi fails to act with expediency, then he must accept voter’s backlash in the forthcoming elections. No more people can be fooled.