Despite decontrol, petroleum still a handy tool for govt

In a subsidised pricing regime, the govt was on the receiving end, but the opportunity thrown up by falling global prices would have been lost had only the consumers benefitted from it

If all these years, price control exercised by the government on petroleum products was evident in the inability of oil marketing companies to hike retail price at their will, this time round a veiled control has been exercised in preventing a price cut for retail consumers.

The government diktat to adjust hike in excise duty against an impending price cut clearly indicates the strings remain attached firmly. Despite decontrol of petrol and diesel price, OMCs continue to look to the government on crucial decisions.

 

Generally, duty changes are passed on to consumers as a hike or reduction through change in prices. The Re 1.50 a litre increase in excise duty on petrol and diesel will, however, not mean an increase in price. This time, Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation have obliged the government by passing on the benefit of falling global prices to the exchequer rather than the consumer. After six consecutive price cuts in petrol and two in diesel, the three government-controlled companies decided to restraint from a cut and give government additional revenue of around Rs 13,000 crore on an annualised basis. 

 

 

A subsidised pricing regime had all these years put the government on the receiving end but the opportunity thrown up by falling global prices would have been lost had only the consumers benefitted from it. This one step, however, means that even if a spike in prices hardly gets shared equally among all stakeholders—companies, government and consumers, the government is here to share the benefit of falling prices. 

 

It had been few years since the government had stopped using duties to manipulate changes in petroleum prices. The scope for this manipulations reduced ever since the Centre gave up on an ad-valorem duty structure for excise duty on petroleum products. Ad-valorem excise duty allowed the government to take away a fixed percentage of the price as tax. This meant that when global prices went up, there was a cascading impact with the government cornering a higher share in tax. To clip this gap, the UPA government decided to move to a combination of ad-valorem and specific excise duty in case of petrol and diesel when global prices started rising. 

 

So, in 2005, based on the recommendations of the Ashok Lahiri committee, P Chidambaram, the then finance minister, introduced an excise duty of 8 per cent plus Rs 5 for petrol replacing 23 per cent excise duty while for diesel excise duty was kept at 8 per cent along with an additional specific duty of Rs 1.25 a litre.

Again, while presenting his budget in 2008, the finance minister completely did away with the ad-valorem component of excise duty on non-branded petrol and diesel, though it was retained in the higher quality branded versions. The duty was fixed at Rs 14.35 for petrol and Rs 4.60 for diesel.

Few months down the line, in June 2008, when Brent crude touched record level of $140 a barrel, the government was forced to allow a price increase and to insulate some of its impact, it brought excise tax on petrol down  to a flat rate of Rs 13.35, and diesel to Rs 3.60 while making it nil on LPG and kerosene.

 

By bringing down duty and removing ad-valorem component, however, the government over the years reduced its leeway to play around with the excise rate for insulating its revenue or customers from sudden changes in price. 

 

With the current global economic cues not enthusing the oil market and Brent prices falling below $80 a barrel, OMCs could have further cut the retail price of diesel and petrol but even before expiry of a month of pricing freedom in diesel, it was proved yet again that all what meets the eye is not true. And, even if the raising of excise duty in times of falling price was an apt move to make up for fiscal gap, it proves how for the government, petroleum is still the easiest tool to play around when it comes to plugging revenue shortfall.