Rising Fuel Prices May Sink Modi – Here’s Why
In May 2014, the Modi government inherited a crude oil import price over $100 per barrel and petrol selling in India’s four metro cities on average at over ₹76 per litre. For most of the next two years, international oil prices sank to record lows. Given India’s dependence on oil imports, it could’ve been game-changing.
Handed an oil buffer worth billions, this government instead hiked petrol excise taxes nine times in under 15 months starting November 2014, on top of higher state taxes. Yet, such was the largesse they were blessed with that the four metro average petrol price actually fell from ₹68.71 to ₹62.36 in that time. By January 2016, India’s fuel taxes were at unprecedented levels. For the 20 months since then, we’ve been in a historically bizarre position where, even if crude oil was imported for free, we would be charged upwards of ₹35 a litre for petrol. Even in India, where the ridiculous is commonplace, this is astonishing.
The defence offered for these measures followed a pattern that has now become this government’s signature – surface level logic about arresting fiscal deficits and cutting fuel subsidies, supported by moral justifications about the oil sector needing to take its medicine to correct the previous government’s excesses.
This past weekend marked 100 days since the latest government medicine. Starting June 16, oil companies have been permitted to change prices daily based on international market prices. So now, every morning at 6 a.m., oil companies tell us how much we must pay that day. It’s a bold decision because it should bring some transparency and accuracy to domestic prices. It’s a brazen decision because it shrinks the room for insulating people from short-term price spurts and rationalizing them into fortnightly revisions as was previously possible. It’s a smart decision because daily price changes are usually incremental enough for people to accept them. It’s a cunning decision for the exact same reason.
The trouble is, people start noticing eventually. The four metro average petrol price has gone up by over ₹6.1/litre in the last two months. The government has blamed this on high international prices due to hurricanes in America. Again, on the surface, that’s true. But that’s inherent to crude oil prices – they fluctuate at a moment’s notice based on unpredictable and utterly uncontrollable factors. It’s fine for the government say that it wants to stick with daily pricing despite rising prices. But it is also spectacularly missing the point by treating criticism as an opposition to free market pricing. Nobody really cares why international prices are high. People want to know why their governments are collecting over half the selling price of a litre of petrol as tax when they know that international prices are rising.
Instead, in recent weeks, the oil minister has variously claimed that fuel prices have started falling, will keep falling further, and may fall by Diwali. He said that the prices aren’t within his control because the finance minister imposes taxes, not him. He also helpfully suggested bringing fuel under the GST regime instead of subjecting fuel to the two sets of taxes it generates presently.
The finance minister, though, has point blank refused to interfere. He says that these revenues are needed to build highways. Highways to ply vehicles that run on fuel which is taxed to build more highways. He also says that the centre shares 42% of its excise collections with the states and, if states want to lower the taxes they separately impose on fuel, they can. But the states won’t because the centre won’t and the centre won’t because it needs the money. Neither wants to move to the GST because neither has an incentive to leave behind so much exclusive tax money.
This month, India’s crude oil imports at source have been $53-55 per barrel on average, and the government will proudly tell you that it hasn’t raised excise on fuel since January 2016. Once again, that’s true. But it also hasn’t paid more than $55 per barrel on average for the last 20 months. The last time India paid under $55 for 20 months straight – from November 2003 to June 2005 – domestic petrol prices were ₹40-₹43 per litre. Even adjusting for 2017 prices to reflect the beating that the rupee has taken in that time, petrol should still be in the ₹58-₹63 range. The four metro average price this morning was over ₹74.
That’s not price fluctuation brought on by unforeseen circumstances. That’s a fundamental shift in how this government feels it can make money. It’s not a coincidence that over half of all of this government’s excise revenue now comes from petrol and diesel collections. In the last three years, this share has doubled, and the contribution of petroleum products to overall government revenue has grown by something like 58%. It has instituted a cycle of extreme dependence on a volatile revenue stream that could affect the functioning of Indian governments for years to come.
Think of it this way: if you buy a litre of petrol a day in Delhi, that’s ₹13,300 you’re putting into this government every year. It’s a government fast growing addicted to your petrol money, charging you a different price for it everyday based on international prices outside its control and, for the moment, showing little interest in scaling back its demands.
To be clear, there are justifications – perfectly good ones, economic and otherwise – for each of these trends. It’s just my opinion that it’s flat out unconscionable that twenty-one-and-a-half rupees from every litre of petrol sold in this country goes into the central government’s coffers, come what may. Twenty-one-and-a-half rupees per litre, even though that amount was stapled onto oil imports when they were at 15-year price lows but now cost nearly twice as much.
If India’s outlay on crude oil imports at source were to cross $100 per barrel – as it did on average for four whole years between November 2010 and the first of the 2014 excise hikes – petrol under current taxation would be more than ₹92 to the litre, and people would be burning vehicles instead of filling fuel in them. Hopefully, international prices won’t go that far and, if they do, the government will pull back its fuel taxes. But international prices tend to be ruthless, and taxes tend to not go down.
Of all the objectionable decisions this government has been rightly and wrongly accused of making, this is might well be the most likely to decide an election or two.