Fuel prices have risen not only in India, but elsewhere too. Even if one ignores it, the fact is that state government taxes account for 41.67 per cent of the final petrol price
Crude oil prices have been rising steadily since the beginning of 2021 when Brent Crude was trading at about $52 per barrel, buoyed both by hopes of improving demand due to economic recoveries across geographies, as well as supply cuts by key oil-producing countries. The Organisation of Petroleum Exporting Countries (OPEC) extended supply cuts made in 2020 when crude oil prices had reached a low of $19 per barrel.
A potential breakthrough in international efforts for a new Iran nuclear deal, which would see international sanctions on Iranian oil removed, would also not have a major impact on oil prices, according to OPEC, which expects that any increase in crude oil production from Iran would happen gradually and would not destabilise the rally in crude oil prices. Speaking of India, the prices of petrol and diesel in India are benchmarked to a 15-day rolling average of the international prices of petroleum products.
Brent Crude oil touched its highest price since October 2018, with oil prices settling at a three-year high above $85 a barrel on 15 October, 2021, boosted by forecasts of a supply deficit in the next few months, as the easing of coronavirus -related travel restrictions spur demand. The US’ West Texas Intermediate (WTI) Crude futures rose 97 cents, or 1.2 per cent, to $82.28 a barrel, on the same day, the eighth consecutive weekly rise.
Demand has picked up with the recovery from the COVID-19 pandemic, with a further boost from power generators who have been turning away from expensive gas and coal, to fuel oil and diesel. The White House said that it would lift COVID-19 travel restrictions for fully vaccinated foreign nationals effective November 8, 2021, which should further boost jet fuel demand. Meanwhile, a sharp drop in oil stockpiles in the United States and the member countries of OPEC is expected to keep global supply tight.
If OPEC+ unexpectedly boosts output, warm weather hits the northern hemisphere and if the Biden administration taps the strategic petroleum reserves, then the oil rally may get derailed but that looks remote for the moment. US energy firms have been adding oil and natural gas rigs as soaring crude oil prices prompt drillers to return to the well pad.
The International Energy Agency (IEA) recently said that the energy crunch is expected to boost oil demand by 500,000 barrels per day (bpd). That would still result in a supply gap of around 700,000 bpd through the end of this year, until the OPEC and allies called OPEC+, add more supply, as planned in January 2022.
The oil glut built up during the pandemic last year has vanished and inventory is depleting rapidly. OPEC’s Joint Technical Committee (JTC) estimates that stockpiles will fall by at least 2 million barrels a day, in the next few months. A relatively weaker dollar is also helping push oil prices higher. Tight supply and strong demand from the US and China could see oil climb sustain at $90 a barrel and maybe more, in the next few months, in the absence of significant Iranian supplies. New nuclear violations may derail Iran’s complete return to global oil markets.
Asian refiners, meanwhile, are grappling with what’s expected to be a brief period of weak profits amid the demand sapping, virus resurgence. Complex refining margins in Singapore, a proxy for the region, have also recovered recently, after slumping to almost zero, in early 2021.
Accelerating vaccination rates are expected to aid demand and margins, going forward. Exxon Mobil Corporation is pulling out of a deep-water oil prospect in Ghana just two years after the West African nation ratified an exploration and production agreement with the US Oil titan, further adding to global supply tightness.
Fuel prices have risen not only in India but elsewhere too. The average retail price for gasoline in the US jumped well past $3 per gallon in 2021, the highest it has been since 2014. California saw highest prices at over $4 per gallon, with reports of global oil demand outstripping supply in the order of anywhere between 6.5 lakh and 9.5 lakh barrels per day, going forward.
The recent bull rally in 2021 in global oil prices, therefore, from a low of $19 a barrel in April 2020 to a high of $85 in October 2021, effectively means crude oil prices have risen by an unbelievable 347 per cent in the last 18 odd months. Since more than 80 per cent of India’s oil demand is met via imports, any surge in global Brent Crude price obviously has a sizeable impact on India too, as both petrol and diesel are now fully deregulated. Maruti Suzuki, for instance, sells over 1.6 lakh units every month, on average, which means, it is selling about four cars every minute. Clearly, despite the brouhaha, oil demand continues to gallop away, outpacing supply, also reflected in rising auto and bike sales.
Theoretically, every $1/barrel fall or rise in Brent Crude price, leads to a 0.45/litre reduction or rise in product prices, assuming “other things” are constant. However, other things like the rupee-dollar exchange rate, cess, refining cost, import duties, shipping charges, freight rates and dealer commissions and profit margins are never constant in the dynamic, real world.
The Opposition parties have often alleged that under the Congress-led UPA-II, despite elevated Brent prices globally, local fuel prices were much lower. Well, that is because fuel prices were only partially decontrolled under the UPA 2. It was Prime Minister Narendra Modi-led NDA government that took the unpopular but bold and long overdue decision of decontrolling diesel prices too, in October 2014.
Hence, comparing fuel price movements under the Modi government with the erstwhile Congress regime is unfair. Also, we should not forget that the previous UPA government took loans by purchasing oil bonds of Rs 1.44 lakh crore; the Modi government inherited and paid. Not only this, but the Modi government also paid Rs 70,000 crore on the interest part alone, which means, in total, the Modi government discharged debt obligations of the earlier Congress regime, by repaying over Rs 2 lakh crore.
To nail the misinformation surrounding domestic fuel pricing, it is best to look at a real-time example.
Let’s assume that the petrol price is Rs 100 per litre. Of this, the basic rate is Rs 32.97 per litre; the Central government tax is Rs 21.58; state government VAT, surcharges and levies are Rs 41.67 per litre; distributor margins work out to Rs 3.78 per litre. Clearly, it is not the Central government but state government taxes that are the biggest component of petrol prices and also the biggest reason for the steep rise in domestic fuel prices.
Effectively speaking, state government taxes account for 41.67 per cent of the final petrol price, whereas Central government taxes account for 21.58 percent of the final petrol price per litre. Hence, before pointing fingers at the Modi government, Opposition leaders like Rahul Gandhi, whose party, the Congress, is a vital part of the ruling alliance in Maharashtra, would do well to do some number crunching! In fact, along with VAT, disaster management cess and highway liquor ban cess, the net share of state taxes in fuel prices in Maharashtra is almost 50 percent and ditto is the case with Rajasthan, another Congress-ruled state, with the highest VAT.
India imports almost no petrol or diesel. It imports crude. But the price we pay for fuel is based largely on Import Parity Price (IPP) or the price we would pay if India were to be actually importing petrol or diesel. India’s export of petrol and diesel is more than imports. India’s total imports in 2017-18 were worth Rs 744 million while total exports were far higher at Rs 23,858 million. Fuel is basically priced as if it is imported.
Oil refiners, who make these products in India, are paid what is called a Refinery Gate Price (RGP) based on the Trade Parity Price (TPP) which is a weighted average of the Import Parity Price and the Export Parity Price (EPP). IPP is the price importers would pay if they actually imported the product. So, it includes not just the cost of the fuel itself, but also freight charges, insurance, customs duty and port charges. EPP is what somebody actually exporting the product would get. IPP has an 80 per cent weight and EPP only 20 per cent in the TPP.
This method of calculating the price to be paid to refiners means that whenever international oil prices rise, they get a windfall. That is because Customs is an ‘ad valorem’ rate or a percentage of the basic value unlike a specific duty which would remain fixed irrespective of basic price. Since Customs duty is 2.5 percent of the imported price, it goes up in absolute terms as the basic price does.
So, at $100 per barrel, the duty on a barrel of petrol would be $2.5 while at $200 per barrel it would be $5. India has to import 80 per cent of the raw material (crude oil), so export parity could not be an option and hence an 80:20 trade parity pricing (TPP) was implemented, in line with the C Rangarajan report. Interestingly, Customs on products is 2.5 percent but this is applicable only on 80 percent of the output, effectively making it just 2 percent.
There are several taxes on domestic crude such as National Calamity Duty and State Entry Tax. These are largely absorbed by the public sector oil refiners. So after adjusting these, the effective Customs duty is minimal.
Effectively speaking, the burden of Customs duty is largely borne by public sector refining companies and hence to allege that refiners make abnormal gains, if global crude prices go up, is absolutely false. To cut a long story short, with the State-level value-added tax (VAT) and sales tax being levied on an ad-valorem basis, tax revenues of states from petrol and diesel, rise in tandem with the increase in their prices. Elevated fuel prices, however, do not help the Centre much, as the excise duties on petrol and diesel levied by the Central government, are specific in nature, like flat rates, so whether petrol is Rs 70 or Rs 100 per litre, is largely meaningless, for Central government from a revenue standpoint. On the contrary, the biggest killing is actually made by states that charge ad-valorem rates and the higher the price of petrol and diesel, the higher the taxes earned by states.
Again, it is nothing but sheer hypocrisy to talk of rising petrol and diesel prices, but not give the Modi government credit for the fact that compared to January 2014, when LPG gas cylinder prices went to as high as Rs 1,270-1,290 per cylinder, average price range of a LPG gas cylinder was between Rs 673 and Rs 710 in 2019. LPG cylinder prices, in fact, fell to a low of Rs 594 in 2020.
True, LPG prices have risen recently to between Rs 884 and Rs 926 per cylinder. But do note that globally, propane and butane prices in the last year have risen from $375 per tonne to as much as $800 per tonne, which is a huge 100 percent-plus increase. Also, do note that while average retail inflation in the last seven years under the Modi government is 4.8 per cent, that number was 7.8 percent in the last seven years of the Congress-led UPA.
Recently, there has also been a surge in edible oil prices globally. Since India imports about 55-70 percent of edible oils like palm oil, soyabean oil and sunflower oil, domestic cooking oil prices have risen too. Argentina, one of the biggest producers of soyabean, faced huge crop losses after a severe drought. Malaysia and Indonesia curtailed exports of palm oil to India and other countries, after a big rise in local demand, due to a change in bio-fuel norms in these countries. Ukraine and Russia, amongst the largest producers of sunflower oil, also faced a debilitating drought, leading to a sharp surge in international prices of sunflower oil.
The good news is that the area under oilseeds has expanded in India in recent times and output is expected to be higher than the previous year. The total acreage under oilseeds increased by 18 lakh hectares or 10 per cent during the 2020 Kharif season, aided by the increased availability of labour after migrant workers returned to their home in rural areas. The acreage for groundnut rose 30 percent and for soyabean by about 7 percent. Similarly, the acreage under oilseeds in the 2020-21 Rabi season was up by 4 percent.
Mustard is the primary oilseed grown during the winter cropping season and the area under the crop is also up 5 percent. According to the third advance estimates of production for the 2020-21 agriculture season, oilseed output expanded by 10 percent to 365.65 lakh tonnes, with the soyabean crop rising almost 20 percent and mustard by 10 percent. Hence, cooking oil prices should come down, going forward.
Allocation of Rs 2.3 lakh crore for health is a 137 percent jump in 2021-22, over 2020-21. Again, Rs 1.18 lakh crore for road infrastructure, Rs 1.10 lakh crore for railways, an outlay of Rs 3.6 lakh crore for the power sector and Rs 16.5 lakh crore towards agriculture credit outlay in the Union Budget showcase how the Modi government is spending money judiciously, towards a healthier, fitter and better India. Defence allocation at Rs 4.78 lakh crore, which is up 19% in FY22, over FY21, is aimed at a safer and secure India. Hence, allegations that resources raised via fuel taxes are being frittered away, are absolutely baseless.
Contrary to falsehoods being peddled, Prime Minister Modi has done an excellent job in controlling retail inflation which came in at 4.35 percent in September 2021. Food inflation came at just 0.68 percent, while vegetable inflation was minus 22.47 percent. Even in August 2021, while retail inflation measured by consumer price index (CPI) was 5.3 percent, food inflation was 3.11 percent, vegetable inflation was minus 11.68 percent. Let’s not forget that globally, food inflation measured by the FAO Food Price Index (FFPI) is currently at the highest levels since 1970.
Food inflation, globally, is up by anywhere between 33 per cent and 47 percent, compared to last year, driven by inclement weather, rising freight and shipping costs and supply-side constraints. Many countries are not even able to import food grains due to depleting forex reserves and rising import costs.
India stands tall, with bountiful supplies and commendable management of the food economy by the Modi government. Those who accuse the current government of rising fuel prices should know that in the last few weeks, gas stations in the United Kingdom ran out of gasoline. Finally, the price of any commodity is largely driven by demand-supply dynamics and given the incumbent global shortages and rising fuel demand worldwide, India too, is seeing a rise in prices but on a relatively smaller scale, versus global peers.
India, under Prime Minister Modi, is planning to increase natural gas consumption by 2.5 times, as part of the energy mix, to 15.5 percent by 2030, from the current level of 6.2 percent. The ongoing transition from an “oil economy”, to a “gas economy”, under Modi’s leadership, is steadfastly underway. Over 70 percent of India’s population in more than 400 districts will have city gas distribution (CGD) facilities soon. Only 25 lakh households in India had access to piped natural gas (PNG) in 2014 but thanks to the Modi government’s persistent efforts, that figure more than quadrupled by 2021. Again, India only had 947 CNG stations in 2014, that number rose to 1,470 stations in 2018 and is set to scale up to a massive 10,000 CNG stations in the next few years. Since CNG is anywhere between 45 percent and 60 percent cheaper compared to petrol and diesel, this will make India self-reliant in more ways than one.
The writer is an economist, national spokesperson of the BJP, and the author of ‘Truth & Dare: The Modi Dynamic’. The views expressed are personal.