Who should the nation blame for high fuel prices?

Dear Reader,

This is the second part of a two-part series on high petrol and diesel prices that currently prevail. Before you read this, I would request you to read the first part.

In the first part of the series, I had explained why petrol and diesel prices now are higher than they were in May 2014, when the price of oil was much more than it is now.  

The three basic reasons for it are 1) Higher dealer commission on petrol and diesel. 2) The central government taxes on petrol and diesel have gone up. 3) The state government taxes on petrol and diesel have gone up. But there is a little more to it than just this, which is why I said that you should read the first part before reading this.

Given that they have raised tax rates on petrol and diesel, both central and state governments have collected more taxes than they did in the past. Let’s take a look Figure 1, which basically plots the contribution of the petroleum sector to the central exchequer.

Figure 1:

Source: Petroleum Planning and Analysis Cell.

The contribution of the petroleum sector to central exchequer primarily includes 1) cess on crude oil 2) customs duty 3) excise duty 4) income tax paid by oil companies. 5) dividend paid by the oil companies to the government 6) dividend distribution tax paid by oil companies to the government.

As can be seen from Figure 1, the main item in the contribution of the petroleum sector to the central exchequer is the excise duty (the blue bar) that the central government collects on every litre of petrol and diesel sold in the country. Currently, the total excise duty on petrol is Rs 19.48 per litre, whereas that on diesel is Rs 15.33 per litre. There is an excise duty of 14 per cent on aviation turbine fuel as well.

By increasing excise duty on petrol and diesel, the Narendra Modi government has been able to capture a bulk of the fall in the price of oil.

In 2014-2015, the excise duty collected from petroleum products stood at Rs 99,184 crore. By 2017-2018, this had jumped to Rs 2,29,019 crore. This is a jump of more than 100 per cent. The central government has benefited tremendously from falling oil prices.

Now let’s take a look at the contribution of the petroleum sector to the state exchequer. Take a look at Figure 2.

Figure 2:

Source: Petroleum Planning and Analysis Cell.

The contribution of the petroleum sector to the state exchequer mainly includes 1) royalty on crude oil and gas 2) sales tax/value added tax collected on petroleum products. 3) entry tax.

As can be seen from Figure 2, sales tax/value added tax on petroleum products makes up for the bulk of the contribution of the petroleum sector to the exchequers of state governments.

In 2014-2015, the sales tax/value added tax collections had stood at Rs 1,37,157 crore. By 2017-2018, this had increased to Rs 1,84,091 crore. So, state governments have benefitted from higher taxes and an increase in petrol and diesel prices. Nevertheless, this increase in tax collections has been nowhere near the level seen by the central government.

Hence, when it comes to cutting taxes on petrol and diesel, the central government is in a better position to do so, even though several state governments have gone ahead and cut taxes on petrol and diesel. But on the whole, the central government is in a better position to do so.

One of the points that the central government has made is that the higher taxes collected have gone towards repaying oil bonds that they had inherited from the previous government.

As on March 31, 2014, before Narendra Modi was sworn in as prime minister, oil bonds with a nominal value of Rs 1,34,000 crore were outstanding. These bonds were issued by the government to the oil companies for the under-recoveries (the difference between the administrative price and the cost) they suffered when selling petrol, diesel, kerosene and domestic cooking gas, below cost. This happened up until 2009-2010.

After that, the oil companies were paid directly from the central government exchequer for any under-recoveries.

There are a few points that need to be made here:

1)  Petroleum products in India for a very long period of time were sold by oil marketing companies below the cost of producing them. The government compensated these under-recoveries by issuing oil bonds. The oil bonds had to be repaid over a period of time. This needed money. Where did this money come from? It came from the government increasing the excise duty on petrol and diesel, when oil prices fell dramatically post July 2014. The end consumer did not benefit from falling oil prices in the form of lower prices of petrol and diesel.

Also, more importantly, the end consumer eventually ended up paying for the lower prices of petroleum products he enjoyed in the past. The larger point here is that in economics there is no free lunch, someone has got to foot the bill, eventually. The Indian oil consumer possibly ended up doing so a decade late.

2) Now let’s tackle the political point that is currently being made. The Bhartiya Janata Party (BJP) government had to pay for the oil bonds issued by the Congress government. That is what we are being told now. And that is definitely one way of looking at it.

The BJP was in Opposition from May 2004 to May 2014. And unlike the Congress now, it was a very effective Opposition party. Haranguing the government constantly on high prices of petroleum products, was part of an effective strategy that the BJP ran for the decade it was in Opposition.

Hence, to that extent, the BJP also had some role to play in the Congress government deciding to subsidise petroleum products and then deciding to issue oil bonds against it. If it didn’t, that would mean questioning its credibility as an Opposition party.

The more important point is that any government governing India has almost no control over the price of oil, given that as a country we import more than 80 per cent of the oil that we consume (more than 83 per cent now). This is as true now as it was back then. So, if haranguing the government on high prices of petrol and diesel was correct back then, it is correct now as well. That’s politics for you at the end of the day.

In the run-up to the 2014 Lok Sabha elections, Narendra Modi promised the nation, minimum government and maximum governance. This moto has been forgotten over the last four years. It would have involved making a few bold decisions (not hare-brained ones like demonetisation) and sticking to them.

The revenue bonanza from falling oil prices allowed the Modi government to take the easy way out. The government continues to pump in money into organisations like Air India. It continues to own 21 public sector banks, which continue to suck in the capital which the taxpayer has to provide, year on year. (Of course, the previous Congress government is to be blamed for this as well).

In 2016-2017, 84 public sector organisations made losses, and they continue to operate. Most others hardly provided any return on the capital employed in the business. The top 10 most profitable public sector companies made 63 per cent of the overall profit of the profitable public sector enterprises. They employed around 30 per cent of the overall capital. This tells you the humungous amount of capital locked in public sector enterprises, and which should ideally be used for something else or returned to the people of this country.

Also, other innovative measures like selling a part of the huge amount of land owned by public sector enterprises, and raising revenue through that, was never tried.

The larger point here is that the oil bonanza essentially allowed the Modi government to be lazy and inefficient, and drop its pre-poll promise of minimum government and maximum governance.

To conclude, both the Manmohan Singh government and the Narendra Modi government are responsible for the high prices of petrol and diesel that we are paying today, though, on WhatsApp and other social media, it is just convenient to blame Manmohan.