Why high petrol prices are not a reason for lower taxes or re-regulation

petrol diesel price hike

Shishir Asthana
Moneycontrol Research

Politicians of all colours and affiliations are up in arms over the rising prices of petrol and diesel in the country. Petrol prices have touched a three-year high, a period of time in which crude oil prices have more than halved. For politicians, especially in the opposition, this is the right time to settle scores, as the BJP government had taken to the streets when LPG and kerosene prices were increased during Congress rule.

Politics apart, the two situations cannot be compared. During the Congress years, it was the government that decided the prices of petrol, diesel, LPG, and kerosene. Currently, companies set the price on a daily basis based on various factors.

Crude oil is just one of these factors. Under the new formula, it is mainly pegged to the import parity price of petrol (though there is a small weightage given to export parity also). This means that not only is it linked to the price of petrol in the international market but other variables also act on it to determine its price.

Currency rate, shipping and insurance charges all have a say on the cost of tanking up. There is, however, one constant and that is taxes. Taxes on petrol and diesel have been kept out of the purview of Goods and Service Tax (GST) but both central and state governments have decided not to cut levies despite high prices.

As for the current rise in petrol and diesel prices, the blame is clearly on Hurricane Harvey and Hurricane Irma. These hurricanes affected that part of the US (Houston) which accounts for nearly 40 percent of the refining capacity. World prices of all refining products including petrochemicals shot up on account of the imbalance. The rise in petrol and diesel prices have mirrored the landed price of these two commodities. As refineries in the US restart, these prices are expected to come back to their original levels.

What will remain elevated is the political blame game. Every time petrol and diesel prices rise, the opposition will pounce on the government, while each time it falls government officials will be tweeting away to glory claiming their policy and governance has brought the price down.

Explainer: How Daily Revision Of Petrol, Diesel Prices Works

This time around Oil Minister Dharmendra Pradhan has said that he will not be interfering with the price-setting mechanism of refineries, and rightly so. It has taken a lot of political will, and the blessings of the oil gods who kept prices low, to de-link oil prices from the clutches of politicians. This has resulted in oil subsidy coming down by 86 percent. Subsidy levels of Rs 1.4 lakh crore in FY14 have come down to Rs 19,728 crore in FY17.

While the government benefited from lower subsidies, it used the window given by low crude oil prices to fill up its coffers. Taxes on petrol were 34 percent of petrol price in May 2014 while they now stand at 58 percent. In the case of diesel, taxes accounted for 21.5 percent in May 2014 but now this level has increased to 50 percent.

Before 2014, governments used to justify the high levels of taxes in order to pay for the subsidy on other petro products. Given the disruptions in the last one year that the economy has faced, it is unlikely that the government will be in a hurry to look at revising these taxes.

As for members of the general public, growth in consumption of petrol and diesel consumption and robust sale of automobiles in the country do not indicate that they are thinking twice before turning the ignition key.

The last thing that the country needs is a return of government control on prices. Refiners have planned their expansion and foreign players have declared the intention of setting retail vending in India. Changing the rules halfway through the game will severely damage the country’s image. And it doesn’t make sense for the government to cut taxes on petro products now because the taxes are the main reason a revenue shortfall is not being felt despite a slowdown in the economy.

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