Oil on the boil

With global crude oil now at almost $80 a barrel, petrol and diesel prices back home have climbed up rapidly in recent months. It has not helped at all that the oil price rise has coincided with the steep fall of the rupee. However, the Centre, though under pressure to keep prices in check, seems disinclined to cut excise duties; it hiked these nine times between November 2014 and January 2016 when the oil prices were declining — and cut just once in October 2017. Faced with uncertain revenues on the GST front in particular, it possibly does not want to risk a fiscal slippage at a time when the current account deficit too is slated to expand. States too are reluctant to cut their sales tax on fuels, although Rajasthan and Andhra Pradesh have done so already. The money is big and comes easy. Petroleum products contributed 24 per cent of the Centre’s revenue receipts and 8 per cent of the States’ revenue receipts in 2016-17.

However, a beginning needs to be made in oil pricing reforms. The Centre must direct oil marketing companies to change their pricing mechanism from trade parity price (TPP) to one based on market realities. The TPP is based on product prices in the international market, assuming that 80 per cent of the petrol and diesel is imported and 20 per cent is exported. The reality is that while India imports most of its crude oil requirement, it is self-sufficient in product refining. It is high time the oil marketing companies started pricing their products independently and transparently based on market principles, depending on their distinct cost structures and margin profiles. This will lay to rest allegations of cartelisation. More States must follow the lead of Rajasthan and Andhra Pradesh. The taxes charged by States on petrol and diesel are ad-valorem. So, their collections increase sharply, beyond what may have been budgeted, when oil prices rise or the rupee weakens significantly. Also, the Centre must engage with the States with respect to bringing petrol and diesel under GST. Improved GST collections will give States the confidence to allow these products into the net. It is true that the maximum GST rate is much lower than the effective tax rates being charged by the Centre and States together on petrol and diesel. The Centre can consider higher GST on these fuels for revenue-neutrality. Lower costs and the benefit of input tax credit under GST could help oil companies reduce fuel prices.

Notwithstanding the element of fiscal risk and uncertainty over GST, the Centre could also seriously consider moderating excise duties. Reduced reliance on petroleum revenues would go well with the overall emphasis to improve the tax base and formalise the economy. It would relieve inflationary pressures and perk up investment. The easier option of asking public sector oil marketing companies to go slow on price hikes in the run-up to the polls should be avoided. The emphasis should be on transparent, arm’s length practices.

COMMENT NOW