The Snake and the Piper: Story of the Oil Prices in India

by Atanu Sengupta and Sanjoy De

Oil is the basic lubricant of the economy. The price of this black liquid gold matters a lot in the lives of the common people in an economy. The tremendous growth of mankind and rapid industrialisation can be attributed to the disco-veries of new oilfields. Quite naturally, the global superpowers are at loggerheads to attain greater command over the sources of this precious commodity. However, since West Asia and the Mediterranean region account for about 90 per cent of the oil resources of the world, the crude oil needs of a majority of the countries of the world, including India, are met through imports.

In India, currently around four-fifths of the crude oil needs are met through imports. Ideally, the price of oil at home should have been mainly determined by price of crude oil at the international level and the prevailing foreign exchange rate. However, in India these two factors are not the sole determinants of the final oil price. The end price of oil depends upon several other factors. In fact, a large chunk of crude oil price per litre goes towards taxes, duties, cesses and dealer commission.

In other words, the common people in India pay a much higher price than the international price. Moreover, over the years, it has been observed that benefits of lower crude oil price at the international level have not reached the people of this developing and gigantic democratic country. However, higher international crude oil price has been felt with more intensity at the domestic market. No efforts have been made both at the Centre and the State level with respect to the taxation system to align the price of oil at home with that of the international price.1 This anomaly or inconsistency in the price determination remained all through these years. This is despite the fact that the Goods and Services Taxes (GST) system has already been introduced in the country almost comprehensively. Taxes imposed on oil are much higher than the highest tax slab of 28 per cent of the GST.

Now, the crude oil price has started to rise again, after a long bearish run. So the chances of price fall at home do not arise at all now. All the excuses of rising fiscal deficit, soaring development expenditures are brought to the fore when the question of the high price of oil crops up. But, the logic of development expenditures becomes meaningless when oil—the far-reaching and high impact commodity—is kept outside the purview of development planning. The ill-conceived pricing of oil which does not offer the benefits of low international price to the common people of the country, is principally against all the government's development efforts and gives reforms a bad name.

Squandering the Early Gains

India's sustained economic growth is putting tremendous pressure on its energy resources. This has been more so in the last two-and-a-half decades. However, lately, the failure to bring fresh big oil reserves into production has kept the production stagnant. According to a study conducted by the leading consulting firm, KPMG, exploration activity did not gather pace at all in the last decade. But demand grew at a rapid pace. A large part of the Indian sedimentary basin has not been explored yet, due to lack of technology or lack of desire. This inadvertently resulted in India's huge dependence on overseas oil. Moreover, the KPMG study cautions that India's reliance on foreign oil will only continue to grow in future. This is despite the fact that India made notable early progress in this regard. In Digboi, known as the Oil City of Assam, the first oil well in Asia was drilled. The city saw the first refinery as early as 1901.

Whatever early progress was made by India has evaporated in recent times. Prior to 1991, which marks the initiation period of economic reforms, only 30 per cent of the domestic demand for oil was met through imports from overseas. But the more than two-and-a-half decades of economic liberalisation has accentuated the situation. Presently, about 80 per cent of the domestic demand for oil is addressed through overseas imports.

Liberalisation has raised the demand for oil appreciably. Most of India's demand for oil comes from fuels used for transportation and industrial purposes, motor gasoline and gas oil, and for kerosene and LPG in the residential and commercial sectors. Inadequate investment for the development of more crude oil and liquid production has led the production to rise at a slower rate than the demand.

Perverse Oil Pricing

In a majority of the other countries of the world, any fall in the oil price in the international market is accompanied by a similar decline in the retail price of oil in the domestic market and vice-versa. However, this has not been the case in India. In spite of the country being declared as a welfare state, there is a mystery in the determination of the retail price of oil. For example, on July 11, 2008, when the oil price at the international level skyrocketed to $ 147.27 per barrel, in India, the cost of one petrol oil was Rs 50.62. Again, in the same year of unprecedented global meltdown, when the oil price at the international market nosedived to an incredibly low level of $ 30.28 per barrel, petrol price per litre in India declined only to Rs 45.62. In other words, a much higher rate of excise duty, cess and VAT have been imposed at the time of low international price of oil, so as to garner higher revenues. This ensures that the common people are deprived of the benefits of lower oil prices at the international market. Again, when crude oil price at the international market rose, the home market saw oil prices increasing at a higher proportion. In other words, no compromise has been made with respect to the ability of generating higher revenues through oil pricing. The reason behind India's fuel prices is quite clear. Taxes are the main culprit, accounting for over 50 per cent of retail price of auto fuels.

International oil prices began to descend since mid-2014. However, the benefits of this price decline have not been fetched to the end-users. The government kept on imposing more duties to boost revenues, thereby keeping the price of oil almost same or lowering it by a paltry amount at home. Inelasticity of demand of this precious commodity has been used by all and sundry to generate higher revenues. This distortionary and misguided taxation policy is against the logic of market-determined pricing that is in the air.

A look at the price build-up of petrol and diesel would make the picture more clear. From Table 1, it is evident that on April 6, 2018, dealers paid Rs 35.17 for one litre of petrol to the oil marketing companies (OMCs). Excise duty of Rs 19.48, average dealer commission of Rs 3.60 and VAT of Rs 15.73 were added to this to obtain the final price of Rs 73.98 of a litre of petrol. Similarly, for diesel, Rs 37.47 was charged to the dealer for a litre of diesel. (Table 2) However, the retail price of a litre of diesel scaled up to Rs 64.88 after excise duty of Rs 15.33, dealer commission of Rs 2.52 and VAT of Rs 9.56.

Such a perverse oil pricing policy adopted by India has no parallel in the emerging countries. In fact, in this regard, the Indian Government turns out to be least caring to its common people among the poor South Asian countries. For instance, in Pakistan, both the prices of petrol and diesel are much lesser than those of India. In other words, Pakistan showers more benefits to the end-users of petrol and diesel. This places Pakistan on a relatively more competitive footing than India. If we take into account other South Asian countries such as Sri Lanka, Bangladesh and Nepal, we see more fair pricing of oil.

Retail Selling Price in Neighbouring Countries

(Effective from April 1, 2018)

Source: Petroleum Planning & Analysis Cell

This is strange, considering the avowed Nehruvian philosophy of socialistic pattern of society. It has been claimed by critics and supporters that India followed a pro-socialistic public policy biasing itself towards the poor. This has been supposedly demonstrated in the high subsidies and various types of restrictions on investment and profiteering. The saga of oil prices tells a different story. We find a strong anti-poor bias of the state that could not be corrected. Without a dent on oil, the government cannot be helped to make any pro-poor decision. The study of oil price is the venom of snake that is well documented.

Conclusion

Oil that entails huge economic significance, has been used in a perverse and manipulative way, giving no respite to the common people. This is disgustingly anti-welfare and anti-poor, especially when serious efforts have been made to shift to a reasonable and pro-poor tax structure. All the governments have usurped oil prices for their own advantages—for generating cash to trumpet their so-called pet development initiatives that can actually fetch huge political mileage. This unfair game continued unabated over the years, much to the detriment of the common people. Surprisingly, it cuts across all boundaries—Left, Centre and Rightist. None had the time to look at this vital element of public distress. This is a gift to our people by the Nehruvian socialistic state and its aftermath.

Endnotes

1. With effect from June 16, 2017, all petrol pumps have switched to daily pricing system and have been determining prices of petrol and diesel prices each day on the basis of international market prices of crude oil and foreign exchange rates. Previously, prices changed fortnightly (on 1st and 16th of each month), taking into consideration the average price of crude oil and foreign exchange rate. However, switching to daily system instead of the earlier fortnightly system has nothing to do with the unreasonably higher taxes attached to oil prices. The new system only ensures that international crude price is quoted on a daily basis instead of the 15-days gap of earlier system, in order to determine the end price.

Atanu Sengupta is a Professor, Department of Economics, Burdwan University, Burdwan (West Bengal). Sanjoy De is a Research Scholar,Department of Economics at the Burdwan University, Burdwan, (West Bengal).