Retail prices of petrol and diesel have been rising over the past several weeks. In some parts of the country, the retail selling price of petrol has crossed Rs 100 a litre. Globally, oil prices have been rising because of resurgence in demand, and an increase in the retail prices of petrol and diesel is an outcome of that.
Taxes constitute a high proportion of the retail price of petrol. When tax revenues were hit hard by the Covid-19 pandemic, the Modi government raised the excise duty on petrol and diesel in March 2020 and again in May 2020 to garner revenues. Households did not feel the pain of the rise in excise duties because global crude oil prices had crashed.
Despite a slump in international crude oil prices due to the pandemic, the prices of petrol and diesel did not decline. The gains were adjusted against the excise duty hike to provide a cushion to the government’s tight fiscal situation.
Also read: Weak demand for diesel indicates Indian economy is still struggling to shift gears
Impact of high duty
There are two consequences of the high duty. First, it hurts consumer pockets and can be inflationary. The rise in crude oil prices in recent weeks, amid the elevated excise duties, is causing retail prices of petrol and diesel to rise. High fuel prices will feed into higher inflation.
This could happen through two channels: Directly, as crude products feature as constituents in the Consumer Price Index basket (in the ‘fuel and light’ and ‘transport and communication’ category), and indirectly, as higher transportation costs due to increase in the price of fuel. The latter would impact the price of other products ranging from vegetables, egg, meat, milk, to cement, fertilisers, chemicals etc. The prices of services could also likely rise due to an increase in fuel prices.
Second, it creates excessive fiscal dependence on petroleum products. Petrol and diesel have been easy targets for raising revenues for the government. The government needs to diversify its sources of revenue and reduce its dependence on oil for bridging its fiscal deficit.
The RBI’s MPC has raised concerns over the inflationary impact of rising crude oil prices and high indirect taxes on petrol and diesel. The MPC has called for a calibrated reduction in high indirect taxes on petrol and diesel to contain the build-up of inflationary pressures in the economy.
Oil price controls in India
A look at the revenue composition of the last few years shows that oil has become a significant source of revenue for the government. The share of tax revenues from oil in the government’s gross tax revenue has shown a steady increase. Between 2014 and 2016, when global crude oil prices were declining, the government raised the excise duty on petrol and diesel on multiple occasions. The government’s dependence on the oil sector for revenues is likely to remain high in the next year as well.
In the long run, India has been shifting away from petrol price controls. India imports nearly 85 per cent of its oil needs and since the domestic prices are benchmarked to international rates, retail prices are increasing.
The prices of petrol and diesel used to be fixed by the government under the Administered Price Mechanism (APM), which was in existence since 1975. In order to boost competition, the government announced the dismantling of the administered price mechanism from 1 April 2002.
Post-APM, the pricing of petroleum products was expected to respond to global prices, but the government started setting prices of petrol, diesel, kerosene and LPG to ensure price stability amid extreme volatility in the international markets. Under this regime, subsidies were being given to diesel and kerosene.
The system of price controls put stress on the finances of oil marketing companies as well as of the government. In 2010, on the recommendations of the expert group on a viable and sustainable system of pricing of petroleum products, petrol prices were made market determined. The price of diesel was decontrolled in 2014. Since then, the prices of petrol and diesel are supposed to reflect the prices in the international markets. Domestic prices of petrol and diesel are revised by oil marketing companies based on the changes in the international prices.
Alternate energy sources
Environmentalists concerned about global warming may not object to high taxes on petrol and diesel as they constitute a carbon tax and discourage greater use. Studies indicate that India’s oil needs will be more than any other country by 2040. But carbon taxes are inadequate to move towards renewable sources of energy. There is also a need to incentivise the use of alternate energy sources like natural gas and solar power.
The government has announced initiatives to strengthen the country’s oil and gas infrastructure. It is working towards increasing the share of natural gas in the country’s energy basket from 6.3 per cent to 15 per cent.
Another area that can help reduce the dependence on fuel is incentivising the use of electric vehicles (EVs). This will also provide a boost to India’s efforts at reducing air pollution. The voluntary vehicle scrappage policy announced in the Budget aims to phase out private and commercial vehicles that are more than 15 and 20 years old. The removal of these old cars would give space for fuel-efficient and environment-friendly vehicles and will also help reduce the huge import bill.
Going further, import duty rationalisation is necessary to make EVs more cost-competitive.
Excessive fiscal dependence on oil can discourage the move towards renewable sources of energy. Further, until public transport that depends on renewable power is created, increasing fuel prices by higher excise is only going to pinch pockets without offering a long-term solution.
Easing access to alternate sources of energy is required to save billions of resources on imported fuel, to prevent a surge in trade deficit and to guard against oil-price shocks.
Ila Patnaik is an economist and a professor at National Institute of Public Finance and Policy.
Radhika Pandey is a consultant at NIPFP.
Views are personal.
Also read: Petrol price hikes may annoy you, but cheap oil is not helping climate
My dear sir, if the economy had been growing as it had been under MMS and had not shrunk by 2% of GDP after demonetisation, MMS would have managed the effect of decline in oil price. In fact decline of oil price (before Covif) was advantageous for raising exports. Modi did not take advantage. He was more into polemics against Congress and making Congress mukt bharat, targeting minorities with cow lynchers etc.. By killing the informal sector with demonetisation, there is no purchasing power, demand and production have come down. Engaging in an arms race with China over Article 370, and by various vanity projects and ideological shows like Patel statue, Modi has sunk India. Then you have to raise money to sustain all these unproductive activities, so you have to put up petrol prices. Foreigners do not see India as an investment destination anymore. During MMS’s time, outsiders thought that India was going to be a second China, and there was glowing praise in western papers about the economy.
Can you tell me what benefits were brought by demonetisation ?
Why not the government find alternative resources to tax, like taxing on individuals having more than one residential sites and on unbuilt industrial or commercial sites??
Excellent views. The Govt. has nicely decided to strengthen oil and gas infrastructure. However considering immediate need to reduce petrol and diesel prices and which are also responsible for inflation. Therefore it is suggested as an immediate need to consider blending of ethanol 30 per cent to reduce the price of petrol by minimum 15 rupees per litre. It is possible in this situation and is one of the immediate way. With again some efforts it will work. Best Wishes.Dr. Patil A.S.
30% blending of ethanol? Considering that we’re failing to reach even currently set targets, 30% is wishful thinking. Not to mention, the evidence on Ethanol blending effects, good or bad for environment, is mixed.
Time to remove pandemic tax on petrol so that it can go down, we can’t deregulate and add excise tax,
It was a clever move to add tac during pandemic when oil price crashed, it is time to being back that tax to pre pandemic level,
But does it matter inflation goes up because of higher prices of petrol or because of bigger deficit with government, What does the economist think?
Taxes and duties on petrol/diesel and personal income tax of salaried class are akin to the rice/wheat cycle of Punjab farmers.
Until the day these low hanging fruits stop, govt will keep getting this easy money in the name of tax revenues.
There is no light at the end of this dark tunnel and the tunnel is long
The writers did not comment on why we are in this bind.
The combination of a shrunk economy (due to demonetisation, and Covid), and increased defence expenditure is going to lead to this bind.
According to Mr. Balasubramaniam, former Chief Manager of Central Bank of India, the loss due to demonetisation was Rs. 5 trillion from business closures alone. If you add other potential losses, the total is Rs. 7.3 trillion or 4.5% of GDP.
Manmohan Singh had estimated 2% of GDP. He is credible and has international trust.
Add the prolonged strike by farmers, both agriculture and industry will sink further.
Create conflict with China with Article 370, then we have to spend money through our nose – it is a non-wealth generating expense.
Somebody has to pay. The govt. will make us pay.
Bhakts will rush in and tell us that we have to make sacrifices for the nation. Modi has sacrificed the nation for his personal power and profit, but we should pay.
The big myth on Income Tax Payers in India.
Based on Data from a Chartered Accountants’ Company Secretaries and other professional bodies and groups.
We have 82 Crore Voters out of which,
75% are Agriculturists/Farmers i.e. 61.5 Crores (You exempted them straightaway, but they can also buy cars , bungalows etc. as you quoted.. Your political colleagues, who called themselves agriculturist/farmers, are also enjoying this exemption)
Balance remains, 20.5 Crores
Less:24% BPL Class (Below poverty line)
Means 15 Crore population (who are non-agriculturist and non-BPL).
Less: Non-working wives, unemployed youths, below-taxable income earners, political class (all these are 75%), in a typical indian family only 1 earning member and 5 or 6 are dependent on him.
Balance: 15 -11.25 = 3.75 Crores, is the earning class which can file ITRs and they are already filing ITRs.
So almost no gap as FM is stressing unnecessarily without knowing well her country.
If FM wants more people to come into tax net, then, instead of foolishly resorting to rampant raids, surveys, notices, scrutiny, demonetisations etc., viewed as tax evasion/terrorism and should defy her negative bureaucrats.
Some suggestions are:-
1. Introduce Income Tax on Agricultural Income on big landlords (Say 10 Acres plus), this way, you can add 26% of Agriculturists as tax payers (Politicians are also enjoying this exemption).
2. Instead of introducing 5000/10000 penalties on late filers of IT return,
come out with positive approach and introduce incentives to IT Return filers (learn from Pakistan where IT Assessee gets discount in purchase of Car).
3. Introduce Privilege Card to those paying taxes above certain limit. Privilege Card to entitle assessee with benefits like Priority quota in railway tickets, use of airport lounges, subsidised medical facilities, etc. and let Tax Payers feel proud.
4. Introduce medical insurance/life insurance on basis of average ITR filled, like coverage upto twice of Gross Income in ITR filed for mediclaim and ten times risk cover in case of life insurance.
5. Introduce Pension after 65 Years of age on the basis of tax paid by tax payer during his/her working life.
Let honest taxpayers get certain direct benefits.
As on today, 3.3% of Indian population is filing ITRs as compared to 8% of China. Adding big Agriculturists/Farmers to Income Tax may shoot the figure to more than 10%. It may help you to cool your tax evasion/terrorism mindset and a tax compliant nation.
LET’S SPREAD THIS TO EDUCATE HONEST TAX PAYERS.
Why are we not talking about increase tax payer ; we want more social welfare ; nobody wants to pay tax but everybody wants benefit from govt
We have to include agricultural income to income tax
Hood presentation. Also the agriculture income is the source of all unaccounted money and black economy. Talking bad of industrialists who create jobs and wealth as well as pay taxes has become pastime for the opposition parties and their blind followers.
Good presentation. Also the agriculture income is the source of all unaccounted money and black economy. Talking bad of industrialists who create jobs and wealth as well as pay taxes has become pastime for the opposition parties and their blind followers.
Your list says much about you. How about also including Ambanis, Adanis, who are tax dodgers and defaulters ? Baba Ramdev runs business as a trust to evade tax. How much money does RSS and VHP collect, and how much tax do they pay ? Why are these big time scamsters exempt in your mind ?
Probably nobody answer these questions ? What is the transportation cost component in the cost of food items. What is the actual cost which goes up when the feul price goes up by 3 inr per liter.
In this case, because the vehicle is larger, consumption also increases, up to 38 litres per 100 kilometres, for a payload of 23,500 kg.
Lit. inr per litre. kg per kg cost
38 90 25,300 0.14
38 100 25,300 0.15
actual increase in cost will move from 14 to 15 paise if price goes up from 90 to 100 inr per litre
Sad reality is that our trader uses this as an excuse to increase the price
Finally! The govt is looking for short term gains. This will have long term side effects. I hope sanity returns and govt reduces its taxes.
A Nation running on fossil fuels?
Yes, Ila is right. We can’t forever depend to oil to smoothen our economy. There is more than that meets the eye here. The phases of Pre APM, APM and post APM did not help. It was either over taxing or under-taxing (creating huge debts for the oil companies).
Are the proposed policies an indication to a future where our economic engine will be run on energies other than oil?
probably even modi does not have guts to make statement that agricultural income is taxable. So there is no way you are going to increase the direct tax base. So govt has to look at only indirect tax and oil is the best
But given the reluctance of successive governments to broad base the tax assessee’s ( especially leave a loophole of farm income for people to exploit as means of avoidance of tax), it’s better that indirect taxes are depended upon.
Your article is nonsense. The petrol all over the world have gone up. The crude price has increased from $40 to $60 a barrel. That has induced world wide increase in gasoline prices. Your reason given are flimsy to the reality.
Your article is nothing but nonsense. You are saying flimsy points as if you are putting forward some great argument. The basic question is the question of demand and supply. When the demand is high the prices will and should go up. The basic question is, weather we should encourage the consumption of a commodity of increasing demand and moreover a foreign exchange drainer. It will be in the interest of everybody to bear in mind the experience of Venezuela whose government tried to keep the price of petroleum products artificially low but achieved little other than collapsing of the economy.
How did MMS make the Indian economy grow at 10% when oil was 140 USD/barrel ?
The current waster has managed to raise petrol prices even during Covid pandemic when crude fell.
“How did MMS make the Indian economy grow at 10% when oil was 140 USD/barrel ?….”
Elementary Mr. Watson.
By increasing the debt burden of oil companies. This debt was not part of any budget and had to be later mitigated by not reducing oil prices when the cost of oil in the world market went down. This is on record.
please read carefully we had growth without corresponding increase in employment. meaning that too much black/ill gotten wealth was chasing few good assets and all assets were appreciating. Pls look at real estate market. Price have become normal and affordable for new buyer ; but downside is that existing investor will not get any return ;
Hope all people who bitch in social media understand that there is no free lunch :
1. if i give msp, my inflation will go up
2. if i donot give msp, my farmers will cry
3. If we donot increase direct tax collection, you cannot do social welfare
4. if we increase direct tax collection, many hni might leave india,
5, if we dont increase indirect tax, welfare schemes cannot go
6. if we reduce indirect tax, we have to let go welfare scheme
Long and short ; people must be happy paying money. govt must use that for good purpose without looting; people must be given social security in line with tax paid like many developed countries
Your homilies look correct on the surface. We need to chase up the govt. on taxing Ambanis and Adanis, defaulters like Nirhav Modi, Baba Ramdev who has been evading tax running a business as a charity, and special groups like RSS and VHP who have unaccounted and unaudited sources of income, and who use that money to indulge in mob violence.
And as for govt. using the tax money for good purpose without looting, I agree with you. I am against wasteful expenditure like building a Patel statue, buying a jet for the PM’s travel as if he is the US President, and making a new parliament building , and donating public money for temple construction.
Reposting for you Colonel : this was in reply to you but I posted it by mistake at the top
My dear sir, if the economy had been growing as it had been under MMS and had not shrunk by 2% of GDP after demonetisation, MMS would have managed the effect of decline in oil price. In fact decline of oil price (before Covif) was advantageous for raising exports. Modi did not take advantage. He was more into polemics against Congress and making Congress mukt bharat, targeting minorities with cow lynchers etc.. By killing the informal sector with demonetisation, there is no purchasing power, demand and production have come down. Engaging in an arms race with China over Article 370, and by various vanity projects and ideological shows like Patel statue, Modi has sunk India. Then you have to raise money to sustain all these unproductive activities, so you have to put up petrol prices. Foreigners do not see India as an investment destination anymore. During MMS’s time, outsiders thought that India was going to be a second China, and there was glowing praise in western papers about the economy.
Can you tell me what benefits were brought by demonetisation ?