Pinky Promise

Memory is important – whether it’s your laptop, mobile or yourself, especially the last one, because you can easily buy and upgrade the other two. Voters have a fickle memory and governments benefit the most from it. Old memories get erased slowly and steadily as and when new incidents happen in life – it’s a natural process, as memories do need some space. However, when your life is being crowded with new unimportant incidents, the old memories get wiped off quicker and easier – this process is called ‘Brainwashing’.

Political parties around the world have become accustomed to using such practices, benefitting from fickle memories of the voters. They make promises that you might believe in, however, there’s no legal arrangement for its enforcement. You bring people to power and suddenly, all pinky promises turn childish.“How I wish, the same applied for taxes as well” – Promise to pay taxes in the financial year and just forget them in the assessment year. However, that doesn’t happen to us – ‘the commoners’, we are liable to pay interests, penalties and even charged with civil and at times, criminal charges. While the Governments are free to make and break promises because it’sa democracy (or maybe it’s not).

In 2013-14, the sitting Government (then the opposition party) had run ‘Jail Bharo’ (Voluntary detention), Bharat Bandh (Nationwide strike) and many other campaigns against the rising fuel prices. The issue became the central point of political turnaround. The price of crude oil at that point of time was approximately USD 100 per barrel and above, while the prices of petrol and diesel were subsidised and available to the citizens at INR 71 per litre and INR 52 per litre respectively. However, today the prices of petrol and diesel are approximately INR 95 per litre and INR 80 per litre, while crude oil is available at USD 62 per barrel. Now, there hasn’t been any deflection in the inflation, exchange rates, imports or other economic factors, however, the ratio of crude oil to petrol and diesel has become inverse. So what really changed? Taxes.

Situation prior to 2014

A growing economy needs fuel to run the industry and thereby the economy and thus, fuel was one of the most important factors.  Thus, the Governments subsidized petroleum products and fuels such as petrol, diesel, kerosene and cooking gas. However, crude oil became expensive year by year. Thus, the subsidies resulted in a huge burden for the Governments and thereby the Government proposed decontrolling the prices of petrol in 2010. Although, the decision to deregulate petroleum products and their price in phases was already taken in 2002, to allow the prices to align with market prices, however, two Governments passed by and nobody did anything – better to lose public money, than the public vote. Petrol prices finally got deregulated in June 2010.

Deregulation meant the prices were no longer controlled by the Government. Thus, the market participants i.e. the oil marketing companies such as Hindustan Petroleum (HPCL), Bharat Petroleum (BPCL) and others would decide the price of petrol and diesel based on the market situations. Now, the prices of crude oil kept on climbing and during the period between 2011 to 2013, immediately after deregulation, the crude oil price stayed at USD 100 per barrel. Thus, the petrol prices increased as a result of a dual blow by deregulation and crude oil prices.

Interestingly, the opposition parties (now the Government) blamed the sitting Government in 2013 for poor economics and lack of ability to provide subsidy due to the same. Let’s bookmark this as point A.

Situation after 2014

Prices of crude oil decline steeply after 2014. From USD 100 per barrel in 2014, the crude oil prices reached USD 29 per barrel in 2015 and stayed approximately USD 50 – 60 per barrel since then. The fall in the prices was majorly due to the increase in oil production by the United States, the changes in OPEC regulations and a few other reasons. Meanwhile, the new Government also deregulated the prices of diesel. Thus, petrol and diesel prices were both influenced by the market, said books and theories.

In real life, petrol and diesel prices continued to be regulated by the new Government by changing excise duty rates. Crude oil prices decreased, however, petrol and diesel prices didn’t fall in tandem, in fact, the prices even increased during the said period, thanks to the excise duty rates.

Now, you might be wondering how much can the taxes affect the prices? Let’s put some numbers into this discussion. During the period 2004-05 to 2014-15, the Government provided a subsidy of approximately INR 8,88,000 crore. However, during the period from 2014-15 to 2018-19, the Government collected excise duty (net of subsidy given on petrol) of approximately INR 9,79,500 crore. From providing a subsidy of 8.88 lakh crore, the Government went to collecting 9.79 lakh crore taxes. Do you understand the sheer change in the dynamics now?

When questioned about the increasing prices of fuels even when the crude oil prices were falling, the Government explained that it wants to maintain the prices of fuels by collecting taxes now to create a reserve for providing subsidy when the prices of crude oil increase. Let’s bookmark this as point B.

The recent rise in fuel prices

India still imports 83% of its fuel requirement as per 2018-19 figures, which it had planned to reduce to 67% by 2022 from 77% in 2014. The expectation doesn’t seem to be achievable as domestic production of oil hasn’t picked up. However, that’s not the concern here as the crude oil prices have reduced from the highs of 2013. After the pandemic, crude oil prices even turned negative when the United States West Texas Intermediate (US WTI) fell from USD 17.85 per barrel to USD (37.63) per barrel on April 20, a 300% drop in a day. The OPEC+ also decided to cut its output by 10 million barrels a day to stabilise the prices. Since then, the prices have increased steadily over the year as the lockdowns were opened and have reached USD 60 per barrel level. This has been possible because the OPEC countries whose economy heavily relies on oil sales have been controlling the supply of oil, in a bid to increase the global prices. This is one reason why prices of petroleum products have increased over the year, as also quoted by the Government, apart from blaming the past Governments.

However, it is now important to put into perspective the aforesaid claim along with Point A and Point B that we bookmarked earlier. Firstly, if the heavy excise duty collections made during the past years to ensure a reserve surplus for future subsidies, where are the subsidies now when the country needs to control the fuel prices? Secondly, if the subsidies are not available, should we conclude that this is a result of failed economics by the current Government as claimed by the same political corners in 2014?

Excise duty and Aatmanirbhar Bharat package

When the Government announced the Aatmanirbhar Bharat package – the COVID-19 relief package, the economists were confused about where the amount required for this purpose would be generated. Of course, the Government was heavily borrowing, however, with the fall in crude oil prices, the Government saw an opportunity. While the general public was celebrating and lauding the move that Government is standing with them, little did they know that the Government had also increased the excise duty on petrol and diesel by a record INR 10 per litre on petrol and INR 13 per litre on diesel, to ensure a collection of INR 1,60,000 crore. Wow! And when Central Government can do it, why would cash-crunched State Government stay behind? So, the State Governments also increased their respective VAT rates on petrol and diesel to increase their revenue. Thus, together the Governments themselves accounted for 55-60% of the total retail price of petrol and diesel and all those pinky promises made before elections were sent to recycle bin.

You may feel that given the desperate COVID-19 situation, needed some desperate measures such as opening alcohol shops for increasing State VAT collections and similarly, increasing excise duty on petrol and diesel. However, this is not the first time this has happened. Rather this is only greed that has resulted out of long series of hikes in excise duty followed by state VAT rates. The excise duty on petrol was INR 9.48 per litre in 2014, and that on diesel was INR 3.56 per litre. When the global crude oil prices were falling, the excise duty on petrol and diesel was hiked 9 times in two years, without passing on benefits of lower price to the consumers. Excise duty was increased by INR 11.77 per litre on petrol and INR 13.47 per litre on diesel during those 15 months, increasing the excise duty collection on petroleum products from INR 99,000 crore in 2014-15 to INR 2,42,000 in 2016-17. Barring the small changes in between, in March 2020, once again the Government hiked excise duty on petrol and diesel by INR 3 per litre. In May 2020, the prices of crude oil went further lower and Government grabbed the opportunity by further hiking excise duty on petrol and diesel by INR 10 per litre and INR 13 per litre respectively.

Thus, the excise duty on petrol which was INR 9.48 per litre in 2014, is now INR 32.98 per litre in 2021, while the same on diesel was INR 3.56 per litre is now INR 31.80 per litre. Of course, the State Governments have followed the lead and together have stayed quiet on the whole topic.

Why worry about a few rupees hikes?

Barring the lower income group, everybody can afford a few rupees hike, why so much noise for so little? Well, yes, we can afford a little hike in petrol and diesel prices, however, what if the prices of all your products and services is hiked by the same amount? That will hurt you a little. And it has because there’s no product or service which can be produced, supplied or rendered without the aid of transportation or use of fuel. However, that’s still a smaller point in the whole context.

When prices of petroleum products are increased, a ripple effect happens on the cost of all products and services. While for retail consumers this increases their expenses, for businesses this makes their products and services globally less competitive. How will we compete with global producers when our prices cannot beat the competitors’ bids? Long term global contracts are hurt by such price increments and the opportunities built are sometimes lost forever. To build our exports and forex reserves our products and services must retain quality and effective pricing in the global market. However, with an increase in fuel prices, this competitive edge is somewhat lost while other factors further worsen the situation.

In a world where we are trying to position ourselves amongst the top powerful nations, losing a simple competitive edge can have a long term and far-reaching impact.

Conclusion

There are a few important points to be noted out of this whole discussion. Firstly, it’s wrong to say, that the prices of petrol and diesel are deregulated – the Government still controls the prices indirectly by fluctuating the excise duty rates. Secondly, petrol and diesel price hikes are more because of the Government’s tax collection policy and not the global crude oil prices alone. The Government wants taxes to be collected more easily and petrol & diesel are just dream products. Thirdly, pinky promises made by the Governments should not be believed in. They firstly protest against FDI, against privatisation, against tax policies for the rich few, and petrol-diesel price hikes, then they blame each other and at the end of the day, end up doing the same thing which a few days ago they despised. And lastly and most important – continue paying all kinds of taxes and duties, in full, and within time limits; because you are not a Government, you will have to pay interest and penalties if you fail to keep your promise.

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