Time to cut

The sudden spike in international crude oil prices has helped shine the spotlight, once again, on the unjust structuring of the retail selling price of transportation fuels in India. Domestic consumers are among the worst hit due to the extraordinarily high Central and State taxes on petrol and diesel. Brent crude oil futures are now moving past $65/barrel due to sustained production cuts by OPEC and partner countries, disruption in supplies from the US due to extremely cold weather, and revival in global demand on improvement in activity spurred by the progress in Covid-19 vaccination. With global demand estimated to increase by 5.4 million barrels per day in 2021, crude oil prices could rise higher. All stakeholders, including the OPEC, need to take on the responsibility of cooling the prices in order to support the ongoing recovery in global growth.

Consumers in India lose always — when global crude oil prices fall, the governments at the Centre and the States jack up duties and taxes and appropriate the benefit, and when prices rise they hold on to the higher taxes making consumers pay disproportionately more. Central excise duty and cess amount to ₹32.90 a litre on petrol and ₹31.80 on diesel. With State levies (in which there is a wide variation), the total tax element on the two fuels is 50-60 per cent of the retail price. Further, many States levy tax on ad valorem basis, resulting in higher tax burden when prices rise. There is an urgent need for these duties to be lowered and the Centre has to take the lead here. This is only fair given that the Centre had increased the special additional excise duty and road infrastructure cess on petrol and diesel twice between March and May 2020, hiking the levy by ₹13 a litre on petrol and ₹16 on diesel, making the most of the crash in crude oil prices then. This followed the amendment made to the Finance Bill last year to increase the upper limit for special additional duty on petrol to ₹18 a litre and on diesel to ₹12. With crude oil prices bubbling up now, it is only fair that the Centre rolls back all or part of the hike in duties done last year. The reduction in the excise duty may not materially impact the already wide fiscal deficit budgeted for FY22. It is not fair to expect the States to act first because fuel levies are a significant part of their own tax revenues; the extent to which they can borrow to finance their deficit is also capped by statute.

The Centre cannot afford to take the increase in fuel prices lightly given the nebulous state of economic growth. Steep increase in fuel prices will not only be inflationary but will also adversely impact the prospects of many industries such as auto, aviation and transportation. Besides this, the impact on the external sector also needs to be reckoned with. With oil forming a chunk of the country’s imports, the rupee is likely to come under pressure. It’s time now for the Centre to act.