Fuel prices needn’t rise
FUEL prices have been rising almost daily for more than a week now. The bumps are small, 80 paise at a time. The petrol price hike philosophy appears to have been informed by a standard marketing ploy. Keep the number below a round figure and it will look less than it really is: Just as Rs 99.99 appears to be closer to Rs 90, even though it is almost Rs 100. The creeping hikes also borrow from the playbook of smart HR departments faced with big downsizing targets. They let people go, in drips and drabs, over several months. This has the same impact as a one-time big-bang sacking of a large number of people, but keeps the retrenchment off the news.
The easiest way that the government can stop fuel prices from rising is by cutting taxes on them, and by taking less dividends from oil PSUs.
In any case, most people were expecting their fuel bills to increase dramatically after the UP elections were over. It shows that no one believes that petrol and diesel prices have been really deregulated. Only a nudge from above, caused by electoral calculations, can explain why oil marketing PSUs held fuel prices for more than four months, even though the rupee cost of the Indian crude basket — the crude that Indian refineries buy — had shot up by 19 per cent during that time.
Real deregulation would have meant that fuel prices would have gone up in tandem with the rise in the cost of crude. So, if oil marketing companies were to increase fuel prices at the same rate as the change in crude prices, we should have been paying Rs 18 more for a litre of petrol compared to what we paid in November. That means there is still a long way to go before fuel prices catch up with the cost of crude.
But do petrol prices really need to rise? No, they don’t. To understand why, we need to make a detour into how fuel is priced in India. Even though, petrol and diesel are technically deregulated, their market prices are administered. This is done through a process called Trade Parity Pricing (TPP), which is an 80:20 combination of the cost of importing petrol and the price that companies can get if they export it.
The formula used to calculate this uses the cost of buying petrol at a port town, the cost of transporting it, the cost of insuring the shipment, port charges and customs duty. Now remember all of these are imputed costs, because there is no actual import of petrol. India is a refinery-surplus nation which produces more fuel than it needs and exports a large amount of it. So, even though refineries did not pay any of the charges that actual imports would entail — shipping costs, port charges, insurance and customs duties — they are all considered to be legitimate costs of producing petrol in India. This is nothing but an assured price, a form of protection given to refineries. No economist ever questions this inherent refinery protection, even when they go hammer and tongs at the so-called ‘price-distorting’ effect of MSP given to farmers.
One could argue that crude is the single-biggest cost for refineries and therefore it makes sense to peg petrol prices to changes in the price of crude. However, this argument does not take into account two things: first, the lower costs of refining in India, and second, the fact that Indian refineries are amongst the most complex in the world, which can not only refine the cheapest, most ‘sour’ crude available in the market, but also can quickly adjust their output mix to maximise their margins. At a time when global prices have skyrocketed, there is a case for the government to fix the maximum profit margin that a refinery can be allowed to make.
In fact, at times like this, the government should restrict the export of fuel and other petro-products. This will force refineries to sell their output in the domestic market, removing one reason for giving them assured trade-parity prices. Governments never hesitate to ban exports of agricultural products when prices go up suddenly, so there is no reason not to do the same when it comes to petrol and diesel. Oil marketing companies have made big profits while crude prices were down over the past few years. It is now time for them to moderate their earnings expectations.
Of course, the easiest way that the government can stop fuel prices from rising is by cutting taxes on them, and by taking less dividends from oil PSUs. In 2020-21, the Centre got
Rs 4.5 lakh crore in taxes and dividends from the petroleum sector. That was 28 per cent of its total revenue receipts in that year. The Centre can easily reduce this dependence, especially now that the economy is beginning to come out of its Covid-induced slowdown, and slash excise duties on petrol and diesel.
How will it make up for the short-fall in tax revenues? There are two ways to do it. The first is to increase the fiscal deficit and financing expenditure through borrowings. This will benefit the rich, because increased government borrowing is nothing but an equivalent amount of additional savings for the affluent. The second way to increase revenues is to increase direct taxes on the rich, whether through higher peak tax rates, surcharges, wealth tax or higher capital gains taxes above a threshold. Ideally, the shortfall caused by tax-cuts on fuel should be met through a combination of higher borrowings and more taxes on the well-to-do.
That means, if the government wants, you and I will not need to pay more at our local petrol pump, even if crude prices rise. They can be kept stable by freezing retail prices and adjusting them by lowering government revenues and profit margins of oil companies. This is especially needed for diesel, which is used for public transport, freight, water-pumps in farms and to power generators in factories. Allowing fuel prices to rise further will cause runaway inflation, and stall India’s economic recovery after two long years of dealing with Covid.
The author is a senior economic analyst
