Petroleum Pricing in India – Economics override political expediency

Petroleum prices are always a contentious issue. Historically, political expediency overrode economic considerations. Central government has some compelling reasons not to interfere into market forces, which are currently being effected by global factors. 

India imported 256.32 million metric tonnes 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. Further 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.

It is also important that we look into the tax structure and petroleum prices. On 3^rd September 2018, the price build-up for Diesel and Petrol in Delhi was as follows:

Sl. No.	Description	Unit	Petrol	Diesel
1.	C&F (Cost & Freight) Price (Moving average basis)	$/bbl	84.20	90.59
2.	Average Exchange rate	Rs/$	70.22	70.22
3.	Price Charged to Dealers (excluding Excise Duty and VAT)	Rs/Ltr	39.21	42.85
4.	Add : Excise Duty	Rs/Ltr	19.48	15.33
5.	Add : Dealer Commission (Average)	Rs/Ltr	3.63	2.51
6.	Add : VAT (including VAT on Dealer Commission)	Rs/Ltr	16.83	10.46
7	Retail Selling Price at Delhi- (Rounded)	Rs/Ltr	79.15	71.15

(Data from Indian Oil Corporation Limited)

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

The revenue generated by the taxes on petroleum products is very important for both the Central as well as State Governments. The contribution to central and state exchequer by the petroleum section is significant and in the last few years is as follows:

Year		2014-15		2015-16	2016-17	2017-18 (P)
1.	Contribution to Central Exchequer (in crore) through Tax/ Duties on Crude oil &  Petroleum products	1,26,025		2,09,354	2,73,225	2,84,442
2.	Contribution to State Exchequer (in crore) through Tax/ Duties on Crude &  Petroleum products	1,60,526		1,60,114	1,89,587	2,08,893
3.	Total Contribution of Petroleum Sector to Exchequer through Tax/ Duties      (1+2)	2,86,551	3,69,468		4,62,812	4,93,335

We have to remember that, 42% of the Basic Excise Duty collection at the Centre is given to State governments for infrastructure and welfare programs and 60% of the balance 58% 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. And every one rupee reduction in central duty leads to a loss on about Rs 14000/= crores to the central exchequer.

Earlier, Under Administered Price Mechanism (APM), 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 and there was significant subsidies for the same.

Year	Under-recovery (crore)	Cumulative Total (crore)
2004-05	20,146	20,146
2005-06	40,000	60,146
2006-07	49,387	1,09,533
2007-08	77,123	1,86,655
2008-09	1,03,292	2,89,947
2009-10	46,051	3,35,998
2010-11	78,190	4,14,188
2011-12	1,38,541	5,52,729
2012-13	1,61,029	7,13,759
2013-14	1,39,869	8,53,628

The subsidies for these under recoveries, during the period of 2004-08 when the international crude prices were increasing rapidly, proved grossly insufficient. Since the fiscal position of the Government was already precarious, it could not increase the subsidy to this sector. The UPA government then resorted to issuance of ‘oil bonds’ to the OMCs. These interest-bearing bonds called, The Oil 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, the Oil Bonds worth Rs. 1,42,202 crore were issued by the Government with rate of interest 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 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, putting heavy burden on current as well future governments.

An important part of the solution to the problem can be focusing at the alternative energy source. In the year 2015-16, the source wise share in consumption of energy was as follows:

Sl. No.	Source	Share ( in percentage)
1.	Coal and Lignite	46.28
2.	Crude Petroleum	34.48
3.	Electricity from hydro, nuclear and other renewable sources	12.75
4.	Natural Gas	6.49

Therefore the policy of the Shri Narendra Modi government is to move towards renewable sources of energy. But 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 focussed 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. Till then economic prudence should override political expediency.

Gopal Krishna Agarwal

National Spokesperson of BJP on Economic Affairs

Member Board of Governors Indian Institute of Corporate Affairs (IICA)

gopalagarwal@hotmail.com