Hike in Petrol Price: Is Daily Revision Formula the Real Devil?

While aam aadmi frets over hike in petrol prices, oil marketing companies are benefitting from daily revision.

4 min read

While aam aadmi is fretting over hike in petrol prices, oil marketing companies are benefitting from daily revision.

Petrol prices in Delhi are now eerily close to the levels when Modi took oath as the prime minister more than three years ago. The price of petrol as on 12 September was Rs 70.4/litre, just a rupee lower than the price on 26 May 2014 (Rs 71.4/litre). Prices have reached their highest levels in the last three years. After prices are being adjusted daily since 18 June this year, prices have increased by Rs 5-6 per litre across cities, drawing sharp reactions from people on social media.

Source: <a href="https://www.iocl.com/uploads/priceBuildup/PPAC-MS-12-9-17.pdf">Indian Oil
Price Build-up</a>
Source: Indian Oil Price Build-up
(Infographic: Rhythum Seth/ The Quint)

Government Benefitting from Indirect Taxes

In an earlier article, I deliberated how low crude oil prices have been a boon for the Modi government, resulting in savings and additional indirect tax receipts of Rs 11-13 lakh crore. A significant portion of the growth is attributed to decline in oil prices as our import bill has reduced from Rs 8.6 lakh crore in FY14 to Rs 4.7 lakh crore in FY17.

The government has been filling its coffers by increasing indirect taxes on fuel.

Excise duty collected on petroleum products more than doubled from Rs 0.8 lakh crore in FY14 to Rs 2.2 lakh crore in FY17.

This is the primary reason why consumers have not benefitted despite a sharp reduction in international crude oil prices, down by more than 50 percent since May’14. Rupee has depreciated against the dollar during this period, still the decline in price for consumers is in the range of 40 percent.

Price of petrol is determined mainly by the price of crude oil we import. This is dependent upon international price of crude, and rupee movement against dollar.

Also Read: Petrol Price Highest in 3 Years, up by Rs 6/Litre Since July

Consumers Denied the Benefit of Fall in Crude Price

An analysis of the breakup of price over the last three years shows interesting trends.

  • Price of crude oil adjusted for adverse currency movements have declined by 40 percent or by Rs 18.2 per litre.
  • However, 2/3rd of this decline is compensated by increase in excise duty by Rs 12 per litre.
  • VAT has increased by Rs 3.1 per litre.
  • The rest is being pocketed by OMCs and dealers.
  • Dealers’ margins have increased by 62 percent and OMC margins by 27 percent or Rs 1.2 per litre and Rs 0.9 per litre respectively.
  • Taxes account for nearly 2/3rd of petrol price currently. Such high taxes are only seen for alcohol.
If the benefit of decline in crude oil prices would have been passed onto consumers without any corresponding increase in taxes/margins, price of petrol in Delhi would have been Rs 53.3/litre on 12 September, 25 percent lower than current prices.

Merrymaking by Oil Marketing Companies

As if this was not enough, government introduced the concept of daily revision of fuel prices. The increase in fuel prices in the last three months, since daily revision came into picture, have been very steep.

On 18 June, the first day when daily revision of prices of fuel products came into effect, petrol price in Delhi was Rs 64.9/litre. Since then till 12 September it has increased by Rs 5.47 per litre (8.4 percent).

Only increase in crude oil prices and currency movements do not explain this increase. After Modi government, it’s the turn of oil marketing companies (OMCs) like IOCL, BPCL, HPCL and dealers to make merry by milking the consumers for their benefit.

I am all for de-regulation of prices, and companies having the freedom to set prices.

However, this should have reduced petrol prices in line with a drop in crude oil price. In fact the financial health of the OMCs has improved substantially. Their profits are up and debt is down by more than 50 percent as compared to March ’14. Ultimately these companies are owned by government and have to fulfil socio economic objectives as well. They should not be worried only about their profits.

Also Read: Petrol Price up by 9% From 1 July: Side-Effects of Daily Revision?

Need for Corrective Measures

To conclude, the issue of hike in petrol priced could prove to be a challenge for the government in the coming days. People are familiar with the maths behind petrol prices. The explanation that taxes were hiked to meet welfare objectives and boost infrastructure may not work as there is a need to boost consumption to get economy track. The economic growth has nudged below 6 percent.

(Amitabh Tiwari is an ex corporate and investment banker turned political consultant and commentator. He is co-author of ‘Battle of Bihar’ and can be reached @politicalbaaba. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)

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