Fuel Price Crisis: Issues Behind Petroleum Rates Explained in 7 Points; Lowering Dependency On Oil a long Drawn

By Gopal Krishna Agarwal, 

It is evident than in order to reduce our dependence on imported oil, we need to generate more energy from coal and lignite, which we have in abundance and also focus on electricity generation from hydro and other renewable sources.

India imported 256.32 million metric tones of crude oil and petroleum products in 2017-18 and paid Rs. 6, 52, 896 lakh crore. The import dependence of India in the case of crude oil is over 80 percent.

What is the benchmark crude price for India and how is it determined?

The Indian basket of crude oil represents a derived basket comprising of Sour grade (Oman & Dubai average) and Sweet grade (Brent Dated) of crude oil processed in Indian refineries in the ratio of 72.38:27.62 during 2016-17. The price of Indian crude oil basket was $106.85 per barrel (1 barrel=159 litres) in May, 2014. It fell down to $39.88 per barrel in April 2016 and has gradually increased since then and is around $78 per barrel.

What is the tax structure on petrol and diesel?

On 3^rd September, 2018, the price build-up for Diesel and Petrol in Delhi was as follows

Every dollar increase in the international price of crude oil increases the cost of petrol and diesel in India by Rs. 0.50/ litre and a fall in the exchange rate of the Indian rupee against US dollar increase the cost of petrol and diesel in India by Rs. 0.65/ litre.

What is the revenue generated by taxes on petroleum products?

The contribution to central and state exchequer by the petroleum section in the last few years is as follows:

42 percent of the Basic Excise Duty collection at the Centre is given to state governments for infrastructure and welfare programs and 60 percent of the balance 58 percent of the Basic Excise Duty collection is spent on Centrally Sponsored Welfare Schemes in the States i.e. total amount transferred to States is (42+34.8)= 76.8 percent.

Every one rupee reduction in central duty leads to a loss on about Rs 14000/= crores to the central exchequer.

How does the picture of under-recovery in the oil and natural gas sector look like?

Under Administered Price Mechanism (APM) earlier Petrol /diesel prices were not market linked and prices were being modulated, the steep increase in international prices of oil used to exert severe pressure on the oil marketing companies (OMCs). The retail prices of these commodities were kept below the cost resulting in large under-recoveries for OMCs.

From the year 2004-05 to 2013-14, the total under-recoveries was Rs. 8,53,628 crores.

Why oil bonds issued and what were is their current status?

During the period of 2004-08 when the international crude prices were increasing rapidly, the government started subsidizing petroleum products proved grossly insufficient but since the fiscal position of the government was already precarious, it could not increase the subsidy to this sector. The government resorted to the issuance of ‘oil bonds’ to the OMCs. These interest-bearing bonds were not even reflected on the balance sheet by the UPA government, resulting in artificial measurement of the burgeoning fiscal deficit.

Between 2005-06 and 2009-10, oil bonds worth Rs. 1,42,202 crore were issued by the government with the rate of interest on them ranging from 7.33 percent to 8.4 percent per annum repayable up to 2024-25 by successive governments. Oil companies have either sold these bonds or used them as collateral to raise cash. OMCs have sold oil bonds worth Rs 1,24,536 crore and had to bear a loss of around Rs 5,000 crore in selling of these bonds at a discounted rate because the bond market did not have much appetite for these bonds. Till date the government has repaid around Rs. 70,000 crore to the holders of these bonds and out of this amount, only Rs. 10,000 crore (approx) has gone into the repayment of the principal component and the rest towards the interest obligation. Thus the outstanding principal amount on these bonds is Rs. 1,30,000 crore. Most of these bonds will be matured by 2024-25

How crucial are petroleum products in our energy mix?

In the year 2015-16, the source-wise share in consumption of energy was as follows:

How can India reduce its dependence on crude oil?

Petroleum products are important because one cannot readily switch between them and other sources of energy. To make our economy less dependent on oil would be a long-drawn process, which can be accelerated by conducive government policies. Modi government is working on this long-term solution.

 It is evident than in order to reduce our dependence on imported oil, we need to generate more energy from coal and lignite, which we have in abundance and also focus on electricity generation from hydro and other renewable sources like wind and solar. Since the government is focused on having 1 GWh of installed solar capacity by 2022, we will see an increase in its share in the source-wise energy share in the coming years.