Vol. XLI No. 39 September 24, 2017

Oil Price Hike in the Time of BJP

Surajit Das


THE country is suffering again as the average price of petrol has reached Rs 75 per litre and the average diesel price has reached Rs 62 per litre by the mid-September. The retail price of petrol was this high during the second half of 2013 and the first half of 2014 i.e., during the last year of the UPA-2 government. The average international price of crude oil was more than 140 US dollar per barrel (one barrel=159 litres approximately) then. The NDA government was formed in the end of May 2014. Fortunately, the international crude oil price came down from 146.5 US dollar per barrel (in June 2014) to only 62 US dollar per barrel by January 2015. However, as compared to a drop of 55 per cent in the international price of crude oil, the domestic retail price of petrol registered a drop of merely 22 per cent during the same time period.
Thus, less than 50 per cent of the benefit of reduction in the international price of oil was passed on to the domestic consumers in India. The international price of crude remained less than 70 dollar per barrel since then. The difference between domestic and international price of oil has gone up substantially during the time of NDA government as compared to that during the UPA-2 time. The petrol price went up to nearly Rs 80 per litre during the UPA time primarily because of the high international price of crude oil. But, the recent increase to Rs 75 (more than Rs 80 in Mumbai and elsewhere) per litre has not happened due to any increase in the international oil price but because of the increase in the difference between the domestic selling price and international price of oil. This gap comprises of the cost of refining, marketing (including the profit of the oil marketing companies) and the taxes. 
There is no evidence to suggest that anything other than tax components of the difference under consideration has gone up significantly during the last three years. As a proportion of GDP, the sales tax revenue from the petro-products, which accrues to the state governments, has also not gone up. However, the central government’s tax revenue from petroleum products has almost doubled as the proportion of GDP during the last two years from 0.9 per cent to 1.8 per cent of GDP. Therefore, this time, the price hike has happened primarily because of the higher tax collection from the petro-products by the central government. This has been the main story of oil price in the time of BJP. The argument can be substantiated with the help of the following empirical evidence.

In the above chart, monthly data from January 2010 to September 2017 has been considered on three variables – average international price of crude oil (simple average of the Dated Brent, West Texas Intermediate and the Dubai Fateh) in terms of US dollar per barrel from primary commodity price database of IMF, the exchange rate of rupee per US dollar from the handbook of statistics, RBI and the domestic average price of petrol in rupees per litre (for the four metro cities of Delhi, Kolkata, Mumbai and Chennai) from the Indian Oil Corporation Limited (IOCL). The entire period has been divided into two parts – the UPA-2 regime (i.e., upto May 2014) and the NDA regime (June 2014 onwards). The top most broken line depicts the movement in the international average price of crude oil in terms of US dollar per barrel. This went up to 160 US dollar in 2011 and 2012 from 100 dollars per barrel in mid-2010. This was around 140 dollars per barrel till June 2014. Then, as mentioned above, the sharp decline takes place and it stabilizes below 70 dollars per barrel. The dotted line draws the movement in the exchange rate of rupee per dollar, which has gone up from around Rs 45 per dollar to Rs 65 per dollar on an average during the time period under consideration. With the help of this exchange rate, we have converted the international crude oil price series in dollar per barrel into rupee per litre series, which is depicted by the unbroken thin line in the above graph. Clearly, it went up from around Rs 30 per litre in the beginning of 2010 to Rs 59 (almost double) by September 2013. In June 2014, it was more than Rs 55 when the current BJP government assumed office. However, luckily it came down to Rs 25 per litre by January 2015. It has stabilized more or less near Rs 30 per litre now. When the international crude price went up from Rs 30 to Rs 60, the domestic petrol price also went up from Rs 45 to almost Rs 80. However, when the international price came down from Rs 55 to Rs 25, the domestic price of petrol came down from Rs 78 to only Rs 62 per litre. Therefore, the domestic consumers were deprived of getting the benefit of the lower international oil prices. The unbroken thick line depicts the retail price of petrol (average of Delhi, Kolkata, Mumbai and Chennai) in the graph above. It never went down below Rs 60 per litre before firming up again to more than Rs 74 per litre.

What distinguishes the NDA regime from the UPA-2 regime, vis-à-vis the oil price policy, is the thick broken line measuring the difference between the domestic petrol price and the international price of crude oil in terms of rupees per litre. As is clearly evident, this difference has been maintained at a very high level of Rs 40 per litre since January 2015. The thick broken line depicts how the gap increased from around Rs 23 per litre during the UPA regime to as high as Rs 40 per litre in the NDA regime. As mentioned above, this has happened primarily because of larger tax collection from the petroleum by the central government. Therefore, the recent hike has not happened out of compulsion but it was a deliberate government policy to raise the price. 

The union minister for tourism of the present NDA government, K J Alphons has clarified this on record, “it is an intentional decision made by the government. We are going to tax people who can afford to pay… We are here for welfare of the downtrodden, ensure electricity in every village, make houses, build toilets. It is going to cost enormous amount of money”. Many serious studies, however, have shown that the rise in oil price has a significant negative impact on growth and inflation in the Indian context. Nobody is against larger pro-poor social sector expenditure. However, pitting one against the other, is a cliché tactic. The direct taxes, and not the indirect taxes, are levied following the ability to pay approach. If the government would have been really serious about collecting more taxes, from those who can pay, in order to incur larger pro-people expenditures, the revenue from various direct taxes like income and profit tax should have been increased for those who have the ability to pay. However, when the international price is more or less stable, if the domestic price of petro-products increases to a very high-level due to higher taxation, it is not justifiable. It is definitely going to increase prices in every other sector of the economy and reduce growth in the face of the current slowdown. Instead of providing petroleum subsidy, if the petroleum sector is used as the main vehicle to raise more indirect tax revenue in the central exchequer, it would go against the interest of the majority of the common people of this country. The direction of the pro-people policy should be to reduce petroleum price in the country by reducing the central government taxes on petro-products and to expand expenditure by raising more direct tax revenues from the rich profit and income earners.