Oil Prices: Government Cynically Followed a Policy of Passing on the Costs to People

Date: 
May 03, 2019
Author: 
Shyam

The buzz in global markets is that international oil prices could start rising again with the US scrapping all exemptions to its sanctions on trading with Iran. Given our experience of how the Modi government has dealt with fuel prices in its five years in power, that spells disaster for Indians. The government cynically followed a policy of passing on the costs to people when crude oil prices rose and using low international oil prices to rake in taxes rather than passing on the benefits. Given this track record, can we expect any better from this government in the unlikely event of its getting re-elected?

Consider the facts. As of May 1 this year, the price of diesel in Delhi was Rs 66.71 per litre, Rs 10 more than the price of Rs 56.71 on May 16, 2014, the day the BJP won a majority in the Lok Sabha. Petrol at Rs 73.13 per litre was about Rs 2 per litre more expensive than in May 2014. The subsidised LPG cylinder costs Rs 496 in Delhi today compared to Rs 414 in May 2014, a roughly 20 per cent increase at a time when costs have actually fallen, as we shall see. In other cities and states, the price levels of petrol and diesel are even higher.

Why are prices so high? The government’s claim is that the oil companies are allowed to set their own prices since they were making losses when the government administered the price. Like so much the Modi government tells us, this is a packet of lies. The truth is that less than the half the price you pay for petrol, Rs 35.65 per litre in Delhi, goes to the oil companies and even in the case of diesel only about 60%, Rs 40.21 per litre, goes to the oil companies. The rest is in the form of various taxes.

The government’s own data shows that the Centre’s share of taxes on petroleum crude and products has risen from Rs 1.26 lakh crore in 2014-15 to Rs 2.85 lakh crore in 2016-17, the last full year for which this data is available. That’s an extra Rs 6,500 per family every year if we spread the additional tax burden across all Indian households. The government would argue that this burden is only borne by those who buy petrol or diesel and the poor don’t. This is a fraudulent argument because even those who don’t buy diesel directly pay for it in the form of higher transportation costs for everything they buy.

The result of this burgeoning tax burden is that while the international price of oil has dropped sharply, domestic petroleum prices have continued to rise. In May 2014, when the Modi government came to power, the monthly average international price of what is called the ‘Indian basket of crude’ – a combination of various specific kinds of crude oil that India imports – was about $107 per barrel. Currently it is under $70 per barrel. That is just a little more than half the peak level of $132 per barrel reached in July 2008. When international crude oil prices were at that peak, diesel in Delhi sold for just Rs 34.86 per litre and petrol for Rs 50.62 per litre. Today, with crude oil at about half the peak level, diesel in Delhi is actually about twice as expensive. That tells us just how much this government has squeezed the people through higher taxes on fuel. That it will do so even more should international prices rise is a foregone conclusion. Look at what happened between April 2018 and October 2018. The price of the Indian basket of crude went up from about $69 per barrel to $80 per barrel over this six-month period. In keeping with this, the price of petrol rose by Rs 10 per litre and that of diesel by about Rs 11 per litre. Yet, as we have seen this link between international prices and domestic prices is jettisoned when global prices are on a downswing. The net result is that the aam aadmi gets no relief in either situation.