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What govt. can do to keep fuel prices under check (Relevant for GS Prelims, GS Mains Paper III)

Petrol and diesel prices touched record levels over the weekend with petrol selling at ₹74.40 a litre, the highest it’s been under the current government’s tenure and diesel at Rs. 65.65, largely due to rising global crude oil prices but also on high excise duty on the fuels.

How are oil prices behaving?
Crude oil prices rose at a scorching 24% in the first three months of 2018 before hitting a 40-month high in April following a decline in global inventories, largely caused by the production cuts by the Organisation of Petroleum Exporting Countries (OPEC) members and also by geopolitical tensions in West Asia.

Agencies such as Crisil Research expect crude oil prices to settle at about $70 a barrel during the calendar year of 2018, representing a 27% increase over last year’s level. As a consequence, India’s oil import bill is expected to balloon by about 26% to Rs. 6.5 lakh crore in FY19.

What is the impact of taxes?
The other aspect has to do with the excise duty on petrol and diesel, imposed by the government, which has risen sharply over the last few years. According to data with the Petroleum Planning and Analysis Cell of the Ministry of Petroleum and Natural Gas, the excise duty on branded petrol is Rs. 20.66 a litre or almost 28% of the total price of the fuel. This proportion is 27% for branded diesel.

“Excise duties have risen significantly since 2013-14, accounting for 22-25% of the retail prices of petrol and diesel respectively, compared with 12-15% earlier when crude prices were at similar levels,” Crisil had said.

What can be done?
The advantage of linking domestic fuel prices to the global oil market, as India has done, is that oil marketing companies (OMCs) are no longer forced to sell fuel at subsidised rates. But on the flip side, as can be seen now, is that the consumer is forced to buy fuel at high prices when global price levels are elevated. So, one thing the government can do, and which it is reportedly considering doing, is to ask the OMCs to refrain from passing on the higher oil prices to consumers. In other words, this would represent a return to the previous subsidy regime, albeit somewhat better. “If crude price hikes are not allowed to be largely passed on to consumers, the marketing margins of OMCs will decline by 80 paise to Rs. 1 per litre,” Rahul Prithiani, director, Crisil Research said in the report. “However, that would still be better than the Rs. 1-1.5 per litre margins they have earned historically.”

Is that all?
The government can always reduce the excise duty on petrol and diesel thereby earning a lower revenue but at least easing some burden on the consumers. However, Petroleum Minister Dharmendra Pradhan recently made it clear that the government had no plans to cut the levy as it needed revenue for “developmental needs.” “Centre and States bank on tax revenues to meet developmental needs. Forty-two per cent of collections from excise duty (on petrol and diesel) goes to States and out of the remaining, 60% is used to fund Centre’s share in development schemes in States,” Mr. Pradhan said.

(Adapted from The Hindu)



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