What caused the hike in fuel prices and how Modi govt can put a lid on it

Can Pradhan and Jaitley solve the govt's fuel price hike problem? BS answers

Petroleum Minister Dharmendra Pradhan is under intense political pressure, wrote A K Bhattacharya in a Business Standard column on Monday, adding that Pradhan "is being asked to reduce retail prices of petrol and diesel, which have now risen to the levels that prevailed a little more than three years ago. In May 2014, the monthly average price of the Indian basket of crude oil was almost double of what it is today". (Read Bhattacharya's opinion piece: Dharmendra Pradhan's Chakravyuha)

Pradhan, for his part, on Monday said that fuel prices could come down by Diwali, which is next month. The comments come amid criticism by Opposition parties over a sharp rise in oil prices since the implementation of the daily rate revision mechanism recently. (Read more here) 

However, notwithstanding his remarks on Monday, Pradhan, who was recently elevated to the Cabinet rank and given additional charge of the Ministry of Skill Development and Entrepreneurship, made it clear that the government would not ask state-run oil marketing companies to absorb the price rise in petrol and diesel and stick with market-driven pricing. 

Here are some charts explaining why retail fuel prices have not moved in sync with crude oil rate changes

"The government has no business to interfere in the day-to-day affairs of companies. We have linked product prices to the market and will stick to that," said Pradhan after reports emerged that Bharat Petroleum Corporation (BPC), Hindustan Petroleum Corporation (HPC) and Indian Oil Corporation (IOC) might be asked to absorb the recent hike in global crude oil prices. (Read Oil Minister Pradhan's stand on fuel pricing)

Taxes, not crude oil, responsible for fuel price hikes

Even as the recent hike in the prices of petrol and diesel were being attributed to fluctuating market price of crude oil, industry body Assocham dismissed it and said a sharp hike in taxes in the form of excise and sales tax or VAT by the Centre and states distorted the path of reforms, despite the pricing regime being linked to market-determined rates. (Full report on Assocham's statement on the cause behind fuel price hike) 

At a time when retail fuel prices are at a three-year high, consumers believe the concept of market-determined rates has been tampered with by frequent tax hikes. "Consumers cannot be faulted because the reforms cannot be one-way. If the exchequer got a windfall on drop in crude prices by (way of) additional taxes, the same must be reduced commensurately," said Assocham Secretary General DS Rawat.

Besides Assocham, Bhattacharya also attributed "the tax on petroleum products raised between July 2014 and January 2016" as "the real cause of the current discomfort". 

"... While raising tax rates, Pradhan and (finance minister) Jaitley should have figured out their strategy in the event of oil prices going up and triggering popular unrest. As it turns out, crude oil prices have gone up, but reducing taxes for both the Centre and states is a difficult task because of revenue and deficit implications," Bhattacharya wrote.

Bringing petrol and diesel within the GST ambit?

Last week, Pradhan had said he had requested the Ministry of Finance to bring petroleum products within the ambit of the Goods and Services Tax (GST), a move that Bhattacharya describes as "comforting", in the interest of consumers.  

Justifying the move, Pradhan said there had to be a "uniform tax mechanism" all over the country.

As reported earlier, the petroleum ministry's push for including crude oil, natural gas, petrol, diesel and aviation turbine fuel within the ambit of GST could bring benefits to the industry, as well as customers, at a time of rising retail prices. (Read why bringing petroleum products within GST's ambit could reduce prices) 

Oil refiners and marketers are set to take a hit of Rs 25,000 crore a year because of the exclusion of five petroleum products from GST. IOC, HPC and BPC are likely to bear a loss of about Rs 5,000 crore in this financial year. 

"If this is passed on to consumers, prices might increase by another 60 paise per litre, if the government allows them to do that," Dhaval Joshi, an analyst with Emkay Global Financial Services, told Business Standard.

Pratik Jain of PwC said bringing fuel under GST would establish uniformity of prices but it was too early to say whether prices would decline. "That depends on the rate of GST. The total incidence of taxes on most petroleum products is much higher and I doubt if the GST rate can be around 18 per cent," he said.

GST to the rescue?

Going ahead with Pradhan's suggestion could well work out for the government. "Including petrol and diesel in GST is a way out, but this is a long-term solution," wrote Bhattacharya. "Both GST and enforcing cost-plus pricing for oil companies could be a way out of the Chakravyuha to avoid economic as well as political consequences of the price rise," he concluded. 

States could play spoilsport

Apart from central excise, state VAT is added to fuel pricing. As each state has its own tax structure, prices vary from one to another. States are not keen on including fuel in GST because they have flexibility in altering these taxes, a lever they will lose under GST. Losing revenue on this account might not be a deal-breaker because states are assured of compensation from the Centre for the first five years.

"States were not willing to include petroleum products in the GST regime because they wanted control over a major source of tax revenue," said Debasish Mishra, partner, Deloitte Touche Tohmatsu India. He added that this was leading to a continued distortion in taxes imposed by each state.

Abhishek Rastogi, partner, Khaitan & Co, said, "The inclusion of petroleum products in the GST is a necessity. The states should not worry about compensation as there are corresponding provisions."

India's petrol and diesel prices among Southeast Asia's costliest

Indian fuel prices in the beginning of September were significantly higher than those prevailing in neighbouring nations and the wider Southeast Asian region, thewire.in had reported. (Read more)

Petrol and diesel were on September 1 selling at Rs 69.26 and Rs 57.13 a litre, respectively -- much higher than what prevailed on the same day in Southeast Asian nations like Malaysia and Indonesia and neighbouring countries like Pakistan, Nepal, Sri Lanka, and Bhutan.

The difference between the petrol and diesel prices in India and Malaysia is mind-boggling. Petrol price of Rs 32.19 a litre in Malaysia was less than half of that in India on the same day. The diesel price in the Southeast Asian country, at Rs 31.59 a litre, was 44 per cent lower than that in India. On the same day, petrol and diesel were available in Indonesia at prices 41 per cent and 24 per cent lower than India, respectively.

The difference in auto fuel prices in India and countries within the subcontinent is also no less surprising. For example, the same day, petrol was available at Rs 42.14 a litre at retail fuel outlets in Pakistan, a price nearly 40 per cent lower than that in India. Similarly, diesel in Pakistan was cheaper by 17 per cent.