FIXING oil prices has always been a dilemma in this country. For many years after the multinational oil companies were nationalised in the early 1970s, petroleum product prices were controlled through a system known as administered pricing which basically meant that the government decided on the rates. These rates had little to do with global prices or even the domestic cost of production. It was linked partly to the consumer’s ability to pay and partly to the need to ensure that the exchequer did not suffer losses. Kerosene, for instance, has been kept at artificially low prices for decades in order to provide cheap cooking fuel for the masses. On the other hand, petrol used largely for cars has always been fixed at the highest level, on the assumption that those who buy personalised vehicles have the ability to pay excessive prices for fuel. Besides, car users have not been a vote-catching segment for any government.
Over the years, a complex system of cross-subsidisation evolved through what was known as the oil pool account. Thus higher revenues from products like petrol or aviation turbine fuel were used to cross-subsidise the losses on sales of products like diesel and kerosene. Changes in the world oil prices also did not reflect at the retail level. Any reduction in international markets meant that some surplus was left in the pool account. Rises in international prices were not passed on to the consumer fully owing to the surpluses in the account. It was a complex system that was dismantled by the Vajpayee government. The deregulation process was continued by the UPA regimes. Yet the transition to a market-related regime was difficult since world oil prices began shooting up during the tenure of Dr Manmohan Singh’s government. It was also a time when India’s imports rose to about 80 per cent of its demand as output from domestic oilfields began to stagnate.
On the plus side, it was possible over these years to make subsidies more transparent and include them in the general budget. By 2010, it had been decided to completely deregulate petrol pricing. It was then that the concept of “under-recoveries” came into being to describe sale of some oil products below their cost of import. This did not necessarily translate into losses for the public sector oil refining and marketing companies as they continued to make profits by way of refining margins, as also on other expensive products like petrol.
The entire scenario changed in 2014 when world crude oil prices plummeted from around $140 per barrel to around $40 per barrel. The mountain of under-recoveries was then wiped out. This should have been a time to ease retail prices and lift the burden from consumers. Even with the heavy central and state taxes on petroleum products, retail prices should have fallen significantly for the entire range from kerosene and diesel to petrol and bitumen and aviation turbine fuel. Instead, the newly elected NDA government decided to raise excise duties several times to ensure that prices dropped somewhat but not to the extent as in international markets. As a result, revenues from the oil sector yielded the government Rs 2.67 lakh crore in 2016-17 as against Rs 98,602 crore in 2012-13.
Currently, petrol prices are over 40 per cent higher than in 2008, when the world prices were at their peak. The general public may not have noticed the gradual price increase over the past three years but for the decision to introduce dynamic fuel pricing from June this year. This meant that both petrol and diesel prices would be linked to world markets by the oil companies who would make daily price revisions. It also gave autonomy to the public sector oil companies and brought pricing policy in line with that adopted by many other countries. In the first weeks after launching the new policy, prices fell marginally every day. Later, there was a hardening of prices in world markets by $6-7 per barrel and retail prices then began creeping upwards. Petrol and diesel prices are now at an all-time high despite world prices remaining extremely low.
The spotlight is now on the high taxes on oil products. Clearly, the decision to raise excise duties steeply was not a wise move by the Finance Ministry, though it brought comfort in bridging the fiscal deficit at the time. A better option would have been to raise duties only moderately and at the same time evolve a revenue-neutral duty structure for oil products. In other words, a structure by which revenues accruing would remain the same, despite any volatility in world markets.
The second solution would have been to create a price stabilisation fund for the oil sector. The proposal for setting up such a fund has been made by several expert committees over the years, including the Expenditure Reforms Commission set up by the Vajpayee government. A fund should have been put in place soon after the crash in the world oil prices as it led to an enormous saving in the country’s import bill. The saving could have been invested in a fund meant to cushion a situation when oil prices harden again. In fact, right now oil prices are edging northwards and a fund would have eased the crisis.
It is not too late for the government to fix the price issue. It may find it hard to reduce excise duties at a time when the economy is slowing down and lower inflow of indirect taxes is likely. But high fuel prices can have an inflationary impact and consumers are feeling the pain. The entire impact of rising world oil prices should not be passed through to the consumer. The government needs to absorb the impact for the time being instead of allowing oil companies to simply raise prices at will. In any case, both public and private sector companies continue to make tidy profits owing to high refining margins. Besides, the world prices are expected to subside with the output set to revive soon from shale oilfields in the US. The Finance Ministry needs to take a quick decision on this issue. Only this will atone for the short-sighted policies of raising taxes on oil products taken in the beginning of this government’s tenure. Read more