D M Deshpande
There is no sign of war in Iran abating soon. Diplomacy and mediation by third party nations are not yielding desired results. On the contrary, there are signs of more nations coming into the fray and more attacks on productive and vital energy assets in the Gulf. Given the supply disruptions due to the virtual closure of Strait of Hormuz and escalating war by both sides, global oil prices are rising steadily.
In most of the nations, high oil prices are reflected at the retail/pump level. The increase in prices ranges between 20 to 50 per cent. If the conflict continues and widens, there could be further spikes in oil prices. It would be catastrophic if electrical plants and energy infrastructure are attacked by rival nations. While all this is happening, how is it that in India the oil prices have not risen?
Most of the oil marketing companies (OMC’s) in India are PSU’s. Whether on their own or by prompted by the government, they have refrained from hiking petrol prices, instead, preferring to absorb losses due to higher cost of purchasing petroleum. Against this background, the government has decided to cut excise duty on petrol and diesel by Rs.10 per litre each. After the reduction, the excise levy is Rs 3 per litre on petrol while it is almost zero in respect of diesel.
It is indeed a bold move as the loss in revenues per fortnight is estimated at Rs 70 billion though it may be partially offset by export levies on aviation fuel and diesel to the tune of Rs 15 billion. It is a case of the fiscal trying to arrest oil price rise. The obvious objective is to give some relief to the oil marketing companies, not to bring down the petrol prices for the end users.
Elections in four states and one Union Territory are scheduled for this month; if hike in petrol and diesel prices is curbed, it could be a gain in the present circumstances. Even with this relief, which is not an insignificant one, the oil companies continue to incur losses. Oil pricing is a complex affair that goes through multiple stages of addition to costs.
Crude oils are of different types; hence their prices vary. India imports more than 85 per cent of its needs. The turn of events at the geopolitical level has meant that all payments for oil purchases are to be made in dollars. Since the Indian rupee is under tremendous pressure vis-a-vis the dollar, it is a double whammy. Even when the global oil price is stable, effectively it rises for Indian importers due to falling rupee value.
The landed cost of a barrel of crude oil (around 159 litres) comes to about Rs.35 to Rs.45 per litre. This oil needs to be processed and refined to bring it to usable form. Refineries spend Rs 3 to Rs 5 per litre on refining, including freight and insurance. At this stage it is called the RTP (Refinery Transfer Price).
In the long chain from here on, there are four additions to the final pump price of petrol/diesel. OMC’s margin of Rs 2 to Rs3, the centre’s excise levy, dealers commission Rs 3 to Rs 4 per litre and state’s VAT which varies widely. Typically states levy between 20 to 30 per cent plus on petrol and diesel. States such as Maharashtra and Rajasthan levy high rates while Delhi and Goa have moderate to low rates. Given the inelastic demand, it is a huge source of constant revenue for governments.
Before the latest reduction in central excise, it was about Rs 20 per litre on petrol and Rs 16 on diesel including basic excise duty, special additional excise duty, and road and infrastructure cess. Broadly, the price of oil in India includes the cost of crude oil, refining, freight and insurance-35 to 45 per cent of the retail price. The central excise levy would typically account for 20 to 25 per cent of the final pump price while state taxes add another 20 to 30 per cent. Dealers’ commissions and OMC’s margins are 5 to 8 per cent of the retail price. Effectively, taxes account for a high- 40 to 55 per cent of the total price- end users pay in India!
The decision to cut excise was more of a compulsion rather than a policy choice for the government. However, it is at best piecemeal, temporary and biding time. The PM has appealed to the nation that we all need to stand united in this hour of crisis. However, there is little hope that the states too would respond by reducing their VAT rates. They are dependent on this revenue which is predictable and constant. After GST they have lost most of their rights to levy taxes at the state level. Now there is no central compensation too, for the short fall in VAT revenues. That is why the idea of getting oil and its products under GST is facing stiff opposition.
In the short to medium term, India has to strengthen its capacity of storing ‘strategic reserves’. Our progress in this regard has been slow and tardy. Oil shocks hit India harder than say China or the US which have very large capacity to store oil. This crisis should pave for renewed efforts in augmenting clean, green and renewable energies.
Experts and policy makers need to revisit the current energy subsidy program and perhaps shift from gas, kerosene etc to electricity and solar energy. This is also an opportunity to change our investment incentives and strategies to achieve our overall energy security on a long term and sustainable basis.
The author has four decades of experience in higher education teaching and research. He is the former first vice-chancellor of ISBM University, Chhattisgarh
