In theory, any deregulation of prices should benefit the consumer as competition is bound to increase, which will give the customer power of choice and improved product quality along with better customer service.
But the deregulation in petrol and diesel prices has not played out on those lines as
the government has restricted market factors to influence oil pricing in the country.
On September 1, petrol price was hiked by Rs 3.38 per litre and diesel by Rs 2.67 per litre which was followed by another price revision yesterday, where petrol was up Rs 0.58 per litre and diesel saw a marginal cut of Rs 0.31 paise.
This price hike in petrol and diesel did not get a warm reception as it nearly wiped off the two month declining trend.
Increase in d price for ⛽ @ 3.26+. 58 =3.84 within 20days #Petrol
— Prashant Sharma (@_prashu_sh) September 16, 2016
“The current level of international product prices of Petrol & Diesel and INR-USD exchange rate warrant increase in selling price of Petrol and decrease in selling prices of Diesel, the impact of which is being passed on to the consumers with this price revision,” IOCL said in a statement yesterday.
The burden from the recent rally in global crude prices has been passed on to the consumer, but this has again raised the question why were the benefits not given to the common man when oil prices fell worldwide?
Back in January crude prices saw a steep fall and Brent Futures hit USD 27.10 per barrel, lowest since November 2013.
Rather than passing this drop in price, the government raised levies such as the central excise duty many times in the last two years to increase its revenue.
With the constant hike in excise duty the slump in global crude prices has not benefitted the consumer, and with every rally the price burden has been passed on.
Deepak Shenoy, Founder of Capital Mind said that using excise duty as a controlling lever is another form of regulation itself and termed the current pricing structure as ‘pseudo-deregulation’.
The government has used it as a tool to tinker with fuel pricing and has restricted the deregulation to play out its part.
Deregulation has been done but it a one step thing as the excise duty is not fixed. If it is fixed, only then one will see the pricing benefit come to the consumer, says market expert, Prakash Diwan.
At present the excise duty levied by the government for petrol is around 21.48 per litre, an increase of 177.87 percent against Rs 7.73 per litre on January 1, 2016.
For diesel, it has gone up 121.32 percent to Rs 17.33 per litre from Rs 7.83 per litre at the start of this year.
Easy source of revenue
Excise duty from petroleum products forms a major chunk of government revenue. For fiscal year 2016-17, excise duties contributed 12 percent to the governments total earnings.
The below charts shows the estimated composition and growth of GoI’s excise duty collections:
Source: ICRA Report
For the first quarter, out of the net central excise collection of Rs 91,491 crore, Rs 60,796.25 crore comes from petroleum products.
With deregulation only oil manufacturing companies (OMCs) have turned cash positive and the government has been able to narrow its fiscal deficit.
From the chart above one can clearly tell that the common man pays more tax on fuel then what oil marketing companies charge to dealers. Of the total amount one pays for a litre of petrol, 54.71 percent goes as tax to the government and for a litre of diesel it is 47.76 percent.
He also pointed out that the entire slowdown in corporate profitability, and hence in the direct taxes, has been compensated by the indirect taxes, which is the excise duty.
If you see the bigger picture, the fiscal deficit would have been much higher if this excise duty was not collected, Mishra said.”It’s a trade off—if you have a better macroeconomic scenario then country benefits from stability,” he added.
The fiscal deficit for the first four months of fiscal year 2017 has already reached around 74 percent of the Budget estimates and stood at Rs 3.93 lakh crore, as the government stepped up its spending to make up for the slack in investment by private sector companies.
“At the moment they have room to cut excise duty but they won’t as this USD 45-50 is fair range,” says Hazarika Sabri of PhillipCapital.
“They (government) will maintain status quo unless crude goes beyond USD 60 (per barrel),” Sabri said.
Beyond USD 60 per barrel, government may consider rolling back excise to keep the street prices within a range, opines Debasish Mishra.
Still the argument stands that the price hike could have been avoided if excise duty was reduced as crude prices have more or less stabilized, giving some interim relief to the retail consumer.
The government has increased the service tax rate to 15 percent by adding Swachh Bharat Cess of 0.5 percent and Krishi Kalyan Cess of 0.5 cess and have saved expenses by cutting its subsidy bill on food, fertiliser and petroleum by over 4 percent to Rs 2.31 crore.
It is evident from the way things have worked out till now, excise duty and the fiscal deficit target are directly co-related and roll back of excise will only happen if the fiscal deficit is in range or global crude prices unprecedentaly sky-rocket.