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Petroleum Pricing in India – The True Picture of UPA’s Disastrous Policies

Petroleum Pricing in India

In view of the recent debate on petroleum pricing in India, we at The True Picture researched the various aspects of this entire issue. For an informed public debate, we are putting these in public domain.

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.

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 3rd 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)

 

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 Indian rupee against US dollar increases 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:

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

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. Modi Government i.e. the Centre retains only 23.2% of the tax collections!

States VAT Petrol VAT Diesel
Kerala 30.37% 23.81%
Karnataka 30.28% 20.23%
Andhra Pradesh 35.77% 28.08%
Maharashtra 39.12% 24.78%
Rajasthan 30.80% 24.09%
Delhi 27.00% 17.24%

(source – central Excise and Customs tarrif from http://ppac.org.in/content/149_1_PricesPetroleum.aspx)

Petrol States Petrol price 3 sep input price petrol add excise duty Add VAT % VAT charged state share of excise @ 42% Total state revenue from taxes center’s share of taxes collected Total taxes % share of states in taxes
Kerala  ₹     82.54  ₹     42.84  ₹     19.48 30.37%  ₹     18.92  ₹      8.18  ₹   27.11  ₹    11.30  ₹    38.40 70.58%
Karnataka  ₹     81.82  ₹     42.84  ₹     19.48 30.28%  ₹     18.87  ₹      8.18  ₹   27.05  ₹    11.30  ₹    38.35 70.54%
Andhra Pradesh  ₹     84.01  ₹     42.84  ₹     19.48 35.77%  ₹     22.29  ₹      8.18  ₹   30.47  ₹    11.30  ₹    41.77 72.95%
Maharashtra  ₹     86.65  ₹     42.84  ₹     19.48 39.12%  ₹     24.38  ₹      8.18  ₹   32.56  ₹    11.30  ₹    43.86 74.24%
Rajasthan  ₹     82.13  ₹     42.84  ₹     19.48 30.80%  ₹     19.19  ₹      8.18  ₹   27.37  ₹    11.30  ₹    38.67 70.78%
Delhi  ₹     79.24  ₹     42.84  ₹     19.48 27.00%  ₹     16.83  ₹      8.18  ₹   25.01  ₹    11.30  ₹    36.31 68.88%
Diesel States Diesel price 3 sep input price Diesel add excise duty Add VAT % VAT charged state share of excise @ 42% Total state tax revenue center share of taxes Total taxes % share of states in taxes
Kerala  ₹     76.30  ₹     45.36  ₹     15.33 23.81%  ₹     14.45          6.44  ₹   20.89  ₹      8.89  ₹    29.78 70.14%
Karnataka  ₹     73.52  ₹     45.36  ₹     15.33 20.23%  ₹     12.28          6.44  ₹   18.72  ₹      8.89  ₹    27.61 67.79%
Andhra Pradesh  ₹     77.48  ₹     45.36  ₹     15.33 28.08%  ₹     17.04          6.44  ₹   23.48  ₹      8.89  ₹    32.37 72.54%
Maharashtra  ₹     75.62  ₹     45.36  ₹     15.33 24.78%  ₹     15.04          6.44  ₹   21.48  ₹      8.89  ₹    30.37 70.72%
Rajasthan  ₹     75.87  ₹     45.36  ₹     15.33 24.09%  ₹     14.62          6.44  ₹   21.06  ₹      8.89  ₹    29.95 70.31%
Delhi  ₹     71.24  ₹     45.36  ₹     15.33 17.24%  ₹     10.46          6.44  ₹   16.90  ₹      8.89  ₹    25.79 65.52%

The benefits of these increase in tax collections can be seen in various welfare schemes being run for the common people – for example the rapid pace of construction of rural roads (from 69KM/day in 2013-14 to now 134Km/day), highway construction galloping to more than 26Km/day from a low of 10-12 KM/day between 2012-14; electrification drive, construction of housing, etc. More information on this transformative work can be seen here – What Changed in the 4 Years of Modi Government?

All these welfare schemes are asset creating schemes which in turn spur their own economic cycle thereby further adding value to the overall economy of the country.

Every one-rupee reduction in central duty leads to a loss on about Rs 14,000 crores to the central exchequer and therefore would mean lesser money available for these welfare schemes.

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 were Rs. 8,53,628 crores. The UPA government ran up ‘losses’ of Rs 8.53 lakh crores for oil companies! All this while, this did not even translate to lower petrol prices since the prices back then were not too different from what the prices are now.

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

During the period of 2004-08 when the international crude prices were increasing rapidly, the subsidizing of petroleum products, started by the then Congress led UPA government, proved grossly insufficient but since the fiscal position of the Government was already precarious, it could not further increase the subsidy to this sector.

The Congress government then resorted to 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 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 discounted rate because the bond market did not have much appetite for these bonds.

Till date the NDA 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 mature by 2024-25.

This is the fiscal mismanagement that the Congress led UPA government bequeathed to future governments in order to manage its short-term political interests. Of course, these obligations were left to future tax payers while the Congress government between 2004-14 was hoping to enjoy temporary political advantage.

Essentially, for their present political benefit they taxed the future of India and asked people to repay loans in the future.

How crucial is petroleum products in our energy mix?

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

Sl. No. Source Share (in %age)
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
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 100 GW of installed solar capacity by 2022, we will see an increase in its share in the source wise energy share in the coming years.

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