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What the govt must do to slash petrol, diesel prices immediately

Amitabh Tiwari
·Columnist
·3-min read

Petrol prices are at an all-time high having breached the Rs 100 per litre mark in Rajasthan's Sri Ganganagar and Madhya Pradesh’s Anuppur.

Prices of petrol and diesel continued to rally for the tenth consecutive day and touched new highs across the country on February 18. Petrol price is hovering over the Rs 90 per litre mark in Delhi and Rs 100 per litre mark in Mumbai.

Price charged to dealers for petrol as on February 16, 2021 was Rs 32.10 per litre, while it is sold at Rs 89.29 per litre. Taxes (excise duties, VAT, margins of dealers) account for a whopping 64% of the petrol price.

Price charged to dealers for diesel as on February 16 was Rs 33.71 per litre, while it was being sold at Rs 79.70 per litre. Taxes (excise duties, VAT, margins of dealers) account for 58% of the diesel price.

Excise duty on petrol is Rs 32.90 per litre, while that on diesel it is Rs 31.80 per litre, accounting for 37% and 40% of their retail prices, respectively. It is almost equal to the cost of crude oil, refining charges and freight combined.

Oil prices have breached the $60 per barrel mark due to output cuts, vaccination drive across nations and hopes of a US stimulus.

After deregulation of petrol and diesel prices in 2010 and 2014, oil marketing companies are free to change prices on a daily basis in line with the movements in crude oil prices globally. India imports more than 80% of its oil requirements.

The Narendra Modi government has used low crude oil prices to shore up government revenue without passing on the full benefits to end consumers. It has been milking the consumers for the past 7 years.

When Modi took oath in May 2014, crude oil prices were just above $100 per bbl levels: currently, it is at over $60 per bbl. 1 US dollar used to be worth Rs 57 then, today it is worth Rs 73.

Even accounting for the currency depreciation, crude price has declined by 29% during this period. However, the price of petrol in Delhi has increased from Rs 71 per litre levels to Rs 90 per litre levels, an increase of 27%.

What is this math?

Under the Modi regime excise duty on petrol has more than doubled, while diesel has witnessed an increase of more than 400%. This is akin to cheating customers: prices should have been decreased in line with decline in global crude oil prices.

The central government’s excise duty collections on fuels have almost tripled since 2014.

Excise duty collection & crude import bill

(Source: PPAC)

At a time when consumption, which is one of the key levers of our growth, is struggling to pick up, incomes have been hit due to the pandemic and no tax benefits have been announced by the government in the Union Budget, it seriously needs to think about providing relief to customers.

Considering the fact that fuel pricing is a sensitive topic in India, and also has an impact on inflation due to its high weight in the basket, the government may need to step in and reduce the excise duty.

However, it is also on a tight fiscal path with fiscal deficit projected to decline from 9.5% in FY 20-21 to 6.8% in FY 21-22.

A Rs 5 per litre reduction in excise duty on petrol and diesel each will provide a stimulus of Rs 62,000 crore to the economy. Critics argue that the benefit per household is meager at around Rs 200 per month.

Counter-intuitively this means that this saving will be spent by the households and industries on other stuff that would give a boost to consumption which in turn could trickle down a multiplier effect on the economy.

Rising prices could hurt the BJP’s prospects in state elections due in the second quarter. We should expect some good news about an excise duty relief soon.

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