Despite the pandemic and geopolitical challenges, the government has largely been able to protect people from the full brunt of the global oil price vagaries without comprising fiscal prudence
The popular discourse on fuel prices, largely driven by self-serving political agendas, often exists in binaries: Government is responsible for fuel price rise and that the only solution in offing is to cut duties. The current discussion on the recent hikes in fuel prices is no different. However, the reality is that oil prices are a complex function of various global and domestic factors and to appreciate the nuances of this issue, one needs an objective assessment of how fuel price stack is built up, steps that the government is taking to navigate volatile oil markets and fiscal constraints that guide duty-related decisions that the government has to make.
Duties on oil: Is it fair to put the onus on Centre?
In October 2021, we had written an article explaining details of how fuel price stack in India is built up. There, we had highlighted that duties/taxes levied by the Central government accounted for around 30 percent of the fuel price buildup. Balance 70 per cent remained outside its control.
Things have changed considerably since then. The average cost of crude has gone up considerably due to the Russia-Ukraine war. Both Centre and states (though with exceptions of opposition ruled states) have effected reduction in their taxes. As a result, the contribution of Central duties in the fuel pricing stack has come down further. For example, as on 1 April 2022, petrol in Mumbai was priced at Rs 116.72/litre. Analysis shows that Central excise duties accounted for 24 per cent of this, while duties levied by the state of Maharashtra accounted for 27 per cent; a share larger than that of the Centre.
This equation may change if one undertakes a similar assessment for other cities given the wide variation in state duties. Nevertheless, it is reasonable to conclude that states contribute equally, perhaps even more in some cases (as we have seen for Maharashtra), to the fuel pricing build up as the Centre.
But still, there is no denying that high fuel prices pinch everyone. The government is duty-bound to do whatever it can to protect households whenever such eventualities arise. Had we been self-reliant in meeting our crude oil requirements, the government could have easily insulated the country from the repercussions of geo-political developments like the Russia-Ukraine war. But that’s not the case. We import almost 85 per cent of our crude oil needs and hence remain highly vulnerable to such global externalities. This brings us to the more important question: What is the Modi government doing to reduce our vulnerability to such situations? An assessment of various efforts and initiatives taken by the government in the recent past clearly show that the government is implementing a comprehensive multi-dimensional strategy to: a) over the short term, soften the pressure created by a rapid increase in crude oil prices without comprising fiscal considerations and b) over the medium to longer-term, structurally minimise the dependence of Indian economy to oil and achieve energy self-sufficiency.
Cushioning fuel price increases: Short-term measures
Last year around Diwali, the Centre had cut its excise duties by Rs 5/litre for petrol and Rs 10/litre for diesel. While this measure led to a foregone annual revenue of more than Rs 1.04 lakh crore, it protected people from getting exposed to the full impact of a spiralling rise in crude oil prices.
The government has also been smart in its crude oil procurement. Just around the time when COVID–19 started, the government used the panic in global markets to its advantage and purchased crude oil at $19/barrel for filling our strategic crude reserves. More recently, it is deftly balancing diplomatic pressures from all around to opportunistically purchase crude from Russia at highly discounted rates.
A result of these efforts has been that, India has been able to manage the current volatility much better than other major economies that do not produce crude oil such as Germany (where petrol costs Rs 170/litre and diesel Rs 110/litre), France (petrol Rs 162/litre and diesel Rs 105/litre), Spain, Italy, Netherlands, South Korea and many others. Even within BRICS countries, India has the second-lowest fuel prices, second only to Russia given that it is a major oil producer itself.
Reducing dependence on crude oil: Long-term goal
Transport/mobility accounts for almost 55 per cent of petroleum fuel consumption today. It is also a sector that contributes to large carbon emissions. Rapid electrification of mobility is thus an important strategy of the Government to reduce the demand for fuel and decarbonise transport. In this direction, Indian Railways is being 100 per cent electrified (with 80 percent BG routes already electrified as of March 2022), share of e-buses is being increased and targets have been set to ensure that 30 per cent of all private cars, 70 per cent of all commercial vehicles and 80 per cent of 2-wheelers and 3-wheelers sold by 2030 are electric.
A national biofuel policy is also being implemented to substitute the consumption of petrol and diesel by blending biofuels. As of March 2022, petrol is already being blended by bioethanol to the extent of 10 per cent. A target to take this up to 20 per cent by 2025 is already in place.
Besides these, exploration and production of oil from domestic fields (through Open Acreage Licencing Policy) is being accelerated, natural gas consumption is being reduced through compressed bio gas (SATAT) and favourable terms for crude supply are being negotiated through tough energy diplomacy. These efforts together would structurally reduce India’s dependence on crude oil and put India decisively towards achieving energy self-sufficiency on a sustainable basis.
How have the fuel duties been deployed?
Despite these efforts, it is disappointing to note that some prominent members of the Opposition parties are trying to twist realities to fit into a convenient narrative. Questions are being asked as to why fuel prices of neighbouring countries like Sri Lanka and Pakistan are lower than that in India. While there may be political compulsions behind these moves, severe economic stress that these countries now face is evidence that when it comes to economics, roosters may come home to roost rather quickly.
In a similar vein, a former finance minister gave a figure of Rs 26 lakh crore collected through fuel duties in the last eight years to question where the funds have gone. The taxes collected through fuel have, in fact, been judiciously pumped back into the economy to fund critical social and economic development needs. Data from RBI shows that during the same period, the total developmental spend of the Central government was around Rs 91 lakh crore. This included more than Rs 26 lakh crore in the form of capital expenditure to modernise infrastructure and create productive assets, Rs 25 lakh crore for food, fertilizer and fuel subsidies, and Rs 10 lakh crore on social services such as health, education, affordable housing, etc.
These investments helped the poor gain access to clean toilets, electricity, clean cooking fuel, water connections, network of modern roads, highways, railways and sewerage treatment infrastructure, etc, besides helping the government fund various Covid relief measures such as free vaccination, free food through PM Garib Kalyan Anna Yojana, direct cash, free LPG refill and other support to all needy and vulnerable people for an extended period of time.
It would rather be an understatement that these are extraordinary times that we live in. In 2020, who would have thought that in the next two years, the world would be wracked by a relentless pandemic and would also witness a full-scale war between two large nations. That day is still far when our domestic prices can be completely insulated from such geo-political developments. Despite all challenges, the government has largely been able to protect people from the full brunt of the global oil price vagaries.
Malviya is national head of the Bharatiya Janata Party’s (BJP) Information and Technology cell and also the co-incharge of Bengal. Desai is a public policy professional. All views are personal.