To make sense of sensational news covering high petrol and diesel prices
Feature Articles

To make sense of sensational news covering high petrol and diesel prices

March 2, 2021

By Bhamy V. Shenoy

Under UPA when crude oil price reached a high of 147 dollars per barrel in May 2008, petrol price in Delhi was around Rs. 50 per litre. On Feb. 1 this year, crude oil price was 56 dollars per barrel and petrol price was Rs. 86.30 per litre. Already in Rajasthan and Madhya Pradesh, petrol price has exceeded Rs. 100 per litre. How did UPA achieve this ‘miracle’? Or did PM Modi choose to ‘profiteer at people’s misery and suffering’ as claimed by Sonia Gandhi in her letter protesting against high fuel prices? 

In today’s supercharged political environment even the views supported by facts are often misinterpreted. To keep the record straight I am neither a Modi bakta nor an opponent of any political party — just an energy economist and ‘armchair’ environmentalist. All along I have been a supporter of higher taxes (but opposed to any obscene profit by oil companies through manipulation) to mobilise government revenues,  especially in the case of India. 

UPA managed to keep prices low by forcing Oil Marketing Companies (OMCs) to sell below cost. OMCs were partly compensated by issuing “oil bonds” which are now being paid by NDA. Private oil marketing companies which were far more efficient than public sector companies had to close down their operations. ONGC and Oil India were forced to sell their production at discounted prices. It is to the credit of NDA that they did not take recourse to any such investor-unfriendly policies. It is most unfortunate that having presided over the ruinous oil sector policies, Sonia Gandhi is now calling Modi’s pricing policies as ‘profiteering’. Last year, she accused the BJP regime of “extorting money from people.”

As shown in Figure -1, Central taxes are a big portion of the price paid to buy petrol — increase from Pre-NDA of 15 percent to current level of 38 percent. Same is true for diesel. When NDA took over from UPA in May 2014, excise tax was Rs. 9.48 per litre for petrol and 3.56 per litre for diesel. Currently they are Rs. 32.98 per litre and 31.83 per litre. As a result of such a massive increase, government will be able to collect Rs. 4.7 lakh crore from petrol and diesel taxes. This is significant in comparison to capital expenditure of Rs. 5.54 lakh crore and personal income tax of Rs. 5.61 lakh crore as included in recently announced budget for 2021-22. Do any economists or political leaders call collecting revenues from corporate or personal income tax or GST or customs duties as ‘profiteering’? 

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In her letter, Sonia Gandhi was asking Modi to follow “Raj Dharma.” Public has to decide what is the proper Raj Dharma? Is it selling below cost or taxing those who can afford to support welfare projects like Ujjwala, building toilets, providing health insurance, managing fiscal deficit to control inflation? 

In the midst of increasing opposition to higher fuel prices, Finance Minister Nirmala Sitharaman has managed to convert this “Great Game” of protesting against fuel price rise into a zero sum game between States and the Central by arguing that it is ‘vexatious’ issue. According to her there is a need to discuss higher fuel prices and how reduction will be shared between the State and the Centre. This is rather a strange reasoning coming from the Finance Minister. Protesting against fuel price rise has become “Opposition Dharma” for all political parties. There were such protests by BJP in 2010, 2012, and by Congress in 2018, 2020 and 2021?

Now let us examine who is this ‘common man’ for whose benefits all these protests are organised? According to 2015-16 National Family and Health Services report, just 6 percent of households own cars and 38 percent own two-wheelers. Four-wheelers account for 36 percent of petrol consumption while two-wheelers for 62 percent and three-wheelers for 2 percent. This clearly shows that only the middle class and the rich will be affected by petrol price increase and most can manage. 

When it comes to diesel also we have similar statistics. According to a report by Nielsen for Petroleum Planning and Analysis Cell, transport sector represents 70 percent of diesel consumption. Remaining 30 percent is from the non-transport sectors — use in agriculture mostly for tractors and pump sets (13.0 percent), industry(9 percent), power generation and others (6.5 percent) and mobile towers (1.5 percent), etc. Owner of a tractor or industrial company is hardly a common man.

Petrol and diesel consumption discussed above clearly shows that “common man” who owns no four or two-wheelers, or common farmer who consumes little or no diesel, is little affected. It is true that those who use public transportation will be affected when diesel prices go up and government should consider assisting them. 

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Let us take a look at a couple of misleading or even rank fake news. In 2018, India Today had an article titled “Why Indian Government exports petrol at half the price we pay?”  Though the article debunked this news item which was shared on social network, the headline left a wrong impression. The activist who started this fake news compared the export price with the retail price which includes taxes. 

Recently there was another headlines reported in many papers “51% citizens cutting spending to cope with high fuel prices : Survey.”  This was again misleading because survey was based on unrepresentative sample which was never highlighted.  

It is true that some countries do sell petrol below cost. They are oil exporting countries — often ruled by autocrats or dictators. To ‘pacify’ their citizens, they buy goodwill by selling below cost. In Venezuela, petrol costs Rs. 1.45 per litre and in Iran, Rs. 4.50 per litre. On the other hand there are 41 countries — both developed and developing — where petrol is sold for more than Rs. 100 per litre. Each country has its own political compulsion and India need not be influenced by their pricing policies including that of our neighbours where petrol is cheaper than in India.

There is the unintended benefit of higher petrol price resulting in faster adaption of Electric Vehicles (EVs). This will result in reduction of greenhouse gas producing fossil fuels and India contributing to fight climate change. As reported in Financial Express, there are more footfalls of consumers looking for electric vehicles who want to buy or exchange their internal combustion engine bikes for EVs as petrol prices hit Rs. 100 a liter.

Though strong and convincing argument can be made to justify higher fuel price from economic and environmental points of view, it will be finally decided on political expediency. Already some poll-bound States have cut their State taxes. But who will suffer? As argued in this article, it is the common man who pays either through higher inflation or losing welfare projects. Rich and middle class will again be the winners.


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