As crude oil prices rocketed to $80 per barrel in mid-May and petrol prices reached a historic high of Rs. 78.43 per litre on 29 May in Delhi, the NDA government came under flak.
Former Finance Minister P Chidambaram, tweeted that NDA can cut petrol price by Rs. 25 per litre!
Under UPA, when crude oil price reached $147/b in May 2008, petrol price was only around Rs. 50 per litre. Under NDA, when current crude oil prices are between $75 and $80 per barrel, petrol prices in the country has reached a new high.
On the surface, the prices look unreasonable. However, the reality is different.
Let us see how the UPA managed to keep petrol prices so low. Well, they forced public sector oil companies to sell products below cost; thus they incurred hefty losses.
The government partially compensated losses; the marketing companies absorbed the balance. UPA also forced the crude producing public sector oil companies like ONGC to sell their products to PSU refiners at below-market prices. This was to reduce the subsidy burden on the government. Since private sector oil companies did not get any subsidy during that period of high crude oil prices, they closed down their retail outlets.
Progressive Policy…
Despite crude prices falling steeply, product prices in India are kept high by NDA government measured, small dose increase in excise duty and not allowing benefits of lower crude prices to flow to the consumers. Such a policy has helped the government mop up higher revenues. This, in turn, is spent on infrastructure and welfare projects like health insurance for the poor, building toilets, etc. It also aims to reduce fiscal deficits thereby keeping inflation in check. Welfare projects and lower inflation certainly help the common man while lower petrol and diesel prices mostly help only the middle and rich classes. Higher diesel prices may harm those farmers who use diesel pumps. However, only 12 per cent of diesel consumption is accounted for by agriculture sector. They can be supported through direct benefit transfer.
Who consumes petrol? It is mostly the owners of cars, SUVs and two-wheelers. When 30 per cent of Indians are below the poverty line, and around 20 per cent are just above it and cannot afford cars or two-wheelers, who is this ‘common man’ that the critics voice for? Generating additional revenues of Rs. 4.4 trillion by way of excise duty is progressive. Coincidently, UPA incurred under-recoveries of Rs. 4.3 trillion between 2005-06 and 2014-15.
International Petrol pricing
World over, tax on gasoline supports the government’s budgeted expenditure. Petrol is sold cheap and sometimes below cost only in oil exporting countries. Rulers of those countries exploit oil wealth and adopt such irrational pricing strategies to buy the ‘goodwill’ of their citizens. Environmentalists criticize the relatively lower petrol and diesel taxes in the US. High gasoline and diesel prices are justifiable from an environmental viewpoint as it encourages citizens to use public transportation over private vehicles. Though it is in the broader interest of the country to impose higher taxes on petrol, the poor in the US depend heavily on private vehicles for transportation. Petrol tax will hence become a regressive tax there unlike in India where the poor cannot even afford even a cycle.
Windfall tax
So far, NDA has adopted a rational pricing policy by not passing over the benefit of lower crude oil prices. However, during the assembly elections in Gujarat and Karnataka, they indirectly pressured oil companies not to pass on higher oil prices. It also floated a trial balloon of imposing ‘windfall tax’ on producing oil companies and diverted the revenue obtained from such taxes to reduce petrol prices. Such a tax will sound a death knell to any potential investment by foreign oil companies. It is incredible how our bureaucrats, supported by political leadership, can come up with such investment-unfriendly ideas even as they urge multi-nationals to invest in India. Windfall tax ignores the sanctity of contracts, which is one of the critical factors to attract foreign investment.
In conclusion, though everyone loves low petrol and diesel prices, such a populist policy would hurt the Indian economy in the long run, ruin India’s environment and would only cause distress to the common man.
