Petrol price in India is a perennial source of discussion, no matter which party is in power. Yet again, time has come to open Pandora’s Box. Have you ever wondered why ‘one nation- one tax’ GST didn’t include petroleum products in it? Ever thought why petrol prices are not coming despite historically low prices of crude oil? Well, let me walk you through the nasty business of petrol pricing in India and how you, me and every other Indian is paying its price.
Prior to GST, There were 8 different broad level indirect taxes in India ranging from service taxes to entry tax. Thanks to GST, now we are left with one single tax. However, there is a caveat; petroleum products were not included in that. Petrol is traditionally used to milk money from public. If you are not aware, India is one of the largest importer of petroleum products and it constitutes about 34% of India’s total import’s bill. India is only able to meet 18% of its petrol needs by domestic extraction, 82% of our petrol needs are met by imports. There is something called trade parity price (TPP), the starting point of pricing petroleum products. TPP is the weighted average of import parity price (IPP) to export parity price (EPP) with weights of 80 and 20 respectively. IPP is the price importers would pay; similarly EPP is the price exporters would get on exports.
Now that we have established most of our petrol needs are being met by imports, it is implied that global crude oil prices directly impacts our import bill and ultimately end price of petrol. (Just in case if you don’t know, Petrol and all other petroleum products are extracted from crude oil). On 1st March 2014, price of Brent crude oil was $108.60 per barrel. A barrel equals to 159 litres. So, the 159 litres of crude oil was costing about Rs. 6707/- (at a prevailing exchange rate of Rs. 61.76 per dollar). So, per litre cost of crude oil was Rs. 42.18/-. Though the amount of petrol produced out of per litre crude is not always equal to one litre of petrol as the refining , if we include the bi-products of refining process like diesel, kerosene, tar etc, the monetary value will be the same, approximately. Cost of refining in India costs no more than Rs.0.50 per litre and an additional charge of Rs.6 per litre will be levied by refining companies to compensate capital expenditure and this includes transportation charges also. There will be dealer commission which is generally not more than Rs. 1 per litre. So, everything put together, on 1st march the cost of per litre petrol was Rs. 49.68 but it was being retailed at Rs. 73.16 in Delhi. The difference of those two figures Rs. 23.48 (~32% of total price) was going into the pocket of government.
If you think that was exorbitant, let me bring back to you the current reality. At the time of writing this article, crude oil price is $55.62 and currency exchange rate is Rs.64.15 per dollar. So, per barrel crude oil costs about Rs. 3568/-. After doing aforementioned math, cost of per litre petrol is Rs. 29.94/-. As on 16.09.2017, petrol is retailing at Rs. 74.08 in Delhi. So, the difference amount of Rs. 44.44 (a whopping 60% of total price of petrol) is going to the government. Yes, that’s right; you are paying 2.5 times of actual cost of petrol. Mind you, petrol prices in Delhi are the cheapest amongst all metro cities.
The big question is, where is all that money going and what they are doing with that money? Well, that still remains a big question. Because, no one actually knows what goes behind fixing the petrol prices as they are altered on a daily basis. Petrol prices are one of the most opaque pricing mechanisms in India, a Pandora Box. But, we are not here to give up, are we?
Let us try to find out to where the Rs. 44.44 is going. When the global crude oil prices were plummeting to historical lows, to cover the burgeoning fiscal account deficit, NDA government increased the excise duties. This helped central government to collect over Rs. 2.42 Lac Crore from taxes on fuels in 2016-17 when compared to Rs. 99,000 crore in 2014-15. Excise duty was Rs. 9.48 per litre in April 2014. Then, there were series of hikes in 2015 and 2016 which ultimately increased excise duty to Rs. 21.48 per litre. Similarly, excise duty on diesel was also increased from Rs. 3.65 per litre to Rs. 17.33 per litre between April 2014 and now.
Apart from the excise duty, there are state taxes (like VAT) as well which are applicable to petroleum products in their respective states. If you see the difference between petrol prices in Goa and the prices of your state, you can approximately arrive at the state taxes on petrol prices as Goa state is charging very minimal on petrol. Current day petrol price is Goa is Rs. 64.92 per litre. Approximately, the difference between the price you pay in your state and Rs. 64/- is the amount taxes your state government is charging.
Let us try to compare our oil prices with the world countries. In a developed country like United States where the per capita income is about $60000 (in PPP terms, never mind the jargon), the price of Gasoline in $0.70 per litre. In China, per capita is about $15000, the price of petrol is about $1 per litre. Whereas in India petrol is selling at $1.25 per litre although we have a per capita income of $6000, which is simply unacceptable. Our petrol prices are highest amongst peers, be it emerging nations or the Southeast Asian peers.
On contrary, how the high petrol prices are justified?
On 16th December 2015, Finance minister Arun Jaitely Said in Rajyasabha, “one part of fall in oil prices as a part of proper economic and fiscal planning goes to the consumer; the second part goes to developmental activities, particularly national highways, and rural roads, because those who consume petrol and diesel drive vehicles on these roads, and they must pay for it”.
Recently our petroleum minister Mr. Pradhan backed the decision of daily revision of petrol prices; however, he remained non-committal on cutting taxes to soften the hike in prices. He also said, “The government has no business to interfere in day to day operations of oil companies, if at all, efficiency is only area government will interfere to improve operational efficiency of oil companies.”
When Mr. Pradhan was asked whether the government will cut the excise duty to soften increase in petrol prices, he replied, “That is a call the finance ministry has to take, but, we have to fund massive highways and road development plans, railway modernization and expansion, rural sanitation, drinking water, primary health care and education. Allocations on these have gone up significantly. Where do we get resources for these?”
I have provided you with both the sides of arguments; it is up to you to decide which side to take. However one thing is clear, government is in no mood to ease the excise duty to reduce the burden of petrol prices. But, as a citizen of India who pays exorbitant direct and indirect taxes, I have every right to know to where that money is going. The least government can do is, make the pricing mechanism public and transparent also provide us with the details of how it is being used. Is it too much to ask?
