Oil on the boil: Gov must revisit tax structure

Fuel prices soared across India. Since there are no elections anytime soon in the country, Indian oil companies merrily pass on every increase in global crude oil prices in the true spirit of a market-determined price regime on highly taxed petrol and diesel while the Narendra Modi government looks the other way.
Petrol price with certain additives crossed an unprecedented Rs 100-mark in many cities in Madhya Pradesh, forcing many petrol pumps to shut down as their old analogue fuel dispensing machines were not designed to show a three-digit figure. Its neighbour Maharashtra would soon knock at the three-digit figure. States like Andhra Pradesh, Telangana, Karnataka, Tamil Nadu, Kerala, Bihar, Punjab, West Bengal and Odisha, which are in the Rs 90-a-litre-petrol club, could soon follow Maharashtra in joining the Rs 100-a-litre-petrol club.
For sure, the rise in the price of international crude has played its part. The Indian basket of crude cost $62 a barrel this week, an increase of at least 25% since the end of the last year. The real picture however emerges when the retail price is subdivided. A week ago, the retail price of petrol in Delhi was Rs 89.29 a litre. Of this, Rs 57.19, or 64% of the price, was on account of taxes and dealer commissions. The major portion of tax went to the Centre, Rs 32.90 for a litre. The Centre’s tax is higher than the base price of petrol. While the global fuel prices were to be blamed for a daily increase in fuel prices, it is heavy taxation — as high as 61 per cent in some states — that brought the fuel price to this unprecedented level. Four states, Assam, Bengal, Rajasthan and Meghalaya have taken the lead to reduce fuel taxes. While one may argue that electoral considerations played a part in the decision of the first two states, the other two deserve credit. When the crude price dropped from 2015, the government increased taxes to corner the benefits of a favourable environment. When the environment is changing, people are expected to bear the brunt of the increase. This tax policy could undermine economic growth as fuel is input in many sectors.
The Centre and states should lower taxes before growth prospects are harmed. The stance of the BJP on fuel price has been quite paradoxical. While it demanded higher fuel subsidies when it was in the Opposition to protect consumers from higher global fuel prices when the crude oil price was as high as the US $110 a barrel, it has turned petrol and diesel into a cash cow because of its inelastic demand curve.  On May 16, 2014, when the NDA came to power, the price of petrol in Delhi was Rs 71.41 per litre when global crude oil price (Indian basket) was $106 a barrel. Compared to this, the crude oil now stands at around $55 a barrel, which is almost half of the 2014 price, but the retail petrol price in Delhi, instead of halving, is now Rs 89.

- -Prabhakar Purandare

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