This year the trend has become even more stark in view of the pandemic. With the Centre increasingly looking to ride on the fuel bounty to make up for the fiscal hurt caused by Covid, it seems unlikely that the common Indian consumer will get any relief anytime soon.
With rapidly rising fuel prices threatening to turn into a political hot potato, the government seems to have found itself in a firefight.
Petrol (regular) prices breached the Rs 100 psychological barrier, a first for India, in Rajasthan’s Sri Ganganagar yesterday and in Madhya Pradesh today. Premium variants of petrol, on the other hand, had already crossed Rs 100 at some places in Maharashtra, MP and Rajasthan a couple of days ago. Diesel is also retailing at all-time highs.
Amid rising desperation among the harried consumers of petrol and diesel, PM Modi yesterday put the blame on previous governments for this unabated price spike. If timely steps had been taken by earlier governments to make India energy self-sufficient, India wouldn’t have had to depend on imports, he contended.
For the record, India imported over 85% of its oil requirements and 53% of gas to meet its 2019-20 needs.
However, going by conventional wisdom, fuel prices in India should not have climbed this high despite such high import dependence at a time when international crude prices are at a relatively benign level and the rupee-dollar rate is generally stable.
By way of an example, just before Modi came to power, petrol was selling at a bit above Rs 75 while crude prices were as high as $110 a barrel; but now local prices are in the high 80s or 90s despite crude prices hovering just above $60.
This sounds counter-intuitive, but there is a clear reason: Tax. Over two-thirds of the price you pay for fuel comprise tax and other levies. As a result, less than a third of the retail petrol price in India is affected by a movement in crude prices.
Which essentially means, no matter whatever changes with crude, only about 30% of Indian retail prices will be impacted. As much as 70% of the local prices will remain unaffected.
More precisely, when prices are on fire, it’s the excise tax levied by the Central and state government that is to blame. Under this head, in the last three years, a whopping Rs 14 lakh crore has been mopped up by the Centre and states combined.
And there is a reason why the hands of the states are tied to some extent. The centre has changed the way these taxes are shared with the states, meaning that the central government now helps itself to a bigger pie and states find themselves fiscally cornered.
A game of cess
As economist Ajit Ranade explains, while earlier it was charged more as the sharable central excise tax, now the levy is charged more as cess, which doesn’t have to be shared with the states.
It means the Centre gets to keep more and more of the pie, while states are left in a tight corner. For example, the budgeted fuel tax for next year stands at Rs 3.2 lakh crore, of which the states will get just Rs 7,000 crore, a ToI report says.
As per Finance Commission’s formula, states should get as much as 41% as their excise share. But the cess play now means the Centre gets to keep a much higher pie (some reports put it at almost 90%), leaving states with little option but to impose/raise their own taxes on fuel.
This loss of excise, along with pending GST dues, hurts states substantially. To make up, the states charge extra state excise tax and also VAT, because they simply can’t afford to lose this revenue, explains Ranade.
The central government, in recent years, has seldom gone in for a commensurate cut in excise when international prices have fallen. This, thus, makes for a veritable fiscal windfall for the Centre whenever crude prices go down.
This year the trend is even more stark in view of the pandemic. With the Centre increasingly looking to ride on the fuel bounty to make up for the fiscal hurt caused by Covid, it seems unlikely that the common Indian consumer will get any relief anytime soon.
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