Explained: How Govt Is Relying On Petrol Taxes To Afford Welfare Costs

"I accept that current fuel prices are problematic for people but be it central/state government, over Rs 35,000 crore have been spent on vaccines in a year. In such dire times, we're saving money to spend on welfare schemes. Prime Minister Narendra Modi approved ₹1 lakh crore under Pradhan Mantri Garib Kalyan Yojana scheme to give free food grain to the poor for eight months. Under PM-Kisan, thousands of crores have been directly deposited in the bank accounts of our farmers. The MSP was hiked recently. And all this is happening in the current year," said Pradhan while speaking to media persons.

FactChecker looked at the incessant fuel price hike, how it is computed and what's causing the prices to go up.

What has happened?

Fuel prices surged 24 times since May 4, 2021 — eight times so far June alone. Petrol prices have crossed Rs 100 per litre in seven states and Union Territories — Rajasthan, Madhya Pradesh, Maharashtra, Andhra Pradesh, Telangana, Ladakh and Karnataka.

While Mumbai, on May 29, became the first metro in the country to sell petrol at Rs 100, Bhopal was the first state capital to cross the three-digit figure on May 12. As of June 17, the cost of petrol is Rs 102.88 in Mumbai and Rs 104.91 in Bhopal.

Petrol prices in smaller cities are higher. Cities such as Hanumangarh and Ganganagar in Rajasthan are at a record-high at Rs 106 and Rs 107, respectively. The cost of petrol in cities such as Umaria, Sidhi, Shivpuri, Sheopur, Satna, Panna, Khandwa, Dindori, Chhatarpur, Burhanpur, Balaghat, Badwani and Alirajpur in Madhya Pradesh is Rs 106 while in Anuppur, Rewa and Shahdol it is Rs 107.

How is fuel price computed?

In 2010, the prices of petrol were determined by the government and were revised every fortnight. In 2014 the price of diesel was also deregulated and since 2017 prices are being revised on a daily basis. Since then, the public sector Oil Marketing Companies (OMCs) make decisions on pricing of petrol and diesel based on international product prices, exchange rate, tax structure, inland freight and other cost elements, according to a March 8, 2021 Lok Sabha response.

Some state-run companies such as Indian Oil Corporation Limited (IOCL) Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL) fix retail prices of petrol and diesel in the country.

There are mainly four factors that influence the rise in prices: 1) Crude oil, freight and processing charges to the dealer. 2) Excise duty charged by the government. 3) Dealer commission to the gas station. 4) Value Added Tax (VAT) levied by the state government.

India imports about 82% of required crude oil for its petroleum products. Crude oil is a dark sticky liquid that cannot be used without refining. It is heated until it boils and is then separated into different liquids and gases in a distillation column. This is used to make petrol and diesel. While Brent Crude is the international benchmark price used by the Organisation of Petroleum Exporting Countries (OPEC), West Texas Intermediate (WTI) is the benchmark for United States oil prices. Since India mainly imports crude oil from OPEC countries, (Iraq, Iran, Kuwait, Saudi Arabia and Venezuela) Brent is the benchmark for oil prices in India. Brent crude is extracted from the North Sea of the Atlantic Ocean whereas WTI is usually extracted from US oil fields in Texas, Louisiana and North Dakota.

As on June 16, 2021, the price for Brent Crude stands at $74.65 per barrel which is about Rs 5,470 in India.

The price for petrol and diesel is revised at 6 am every day and the price of crude oil in the international market directly influences fuel prices in India. As international prices rise the import cost also increases.

As on June 16, 2021 the base (actual) price of petrol in Delhi cost Rs 37.29 per litre. The central government charges 34% as Excise Duty and the Delhi state government charges 23% totalling to 57% as the tax on the retail price of one litre of petrol.

Likewise, the base price for diesel stands at Rs 39.90 per litre. If we add central and state government taxes, the cost of diesel makes up nearly 54% of taxes in the retail price for one litre diesel.

High taxes

While international crude oil prices determine the cost of fuels in India, it is only one factor contributing to the rise in petrol and diesel. The main reason for this hike is central and state government taxes.

India's fiscal deficit was at 9.3% of GDP for 2020-21, which was the highest fiscal deficit on record. But, as Pardhan said, levies on fuel is helpling Centre afford the current welfare expenditure.

In fact, the base price of petrol has only reduced — from Rs 47.12 in May 2014 to Rs 37.29 in June 2021 and central taxes increased from Rs 10.39 in May 2014 to Rs 32.9 in June 2021, according to data from Petroleum Planning and Analysis Cell.

According to data from the Controller General of Accounts (CGA), excise duty collection during April-November 2020 was at Rs 1,96,342 crore, up from the Rs 1,32,899 crore during the same period in 2019.

This is when both diesel and petrol consumption dropped during these eight months. According to Petroleum Planning and Analysis Cell (PPAC), diesel sales stood at 44.8 million tonnes in April-Nov 2020, compared to 55.4 million tonnes a year back. Similarly, petrol usage also dropped to 20.4 million tonnes in the eight months this year from 17.4 million tonnes in April-Nov 2019.

In 2014-15, when the Narendra Modi government came to power, the central excise duty collected was Rs 29,279 crore on petrol and Rs 42,881 crore, according to a response Minister of State for Finance Anurag Thakur gave in the Lok Sabha on March 22, 2021. Between April 2020 and January 2021, Rs 89,575 crore had been collected as excise duty on petrol and Rs 2,04,906 on diesel. This is more than a 400% increase.

"By not reducing taxes the government is able to earn higher revenue and we have seen last year that the excise collections were much higher than what was targeted," Madan Sabnavis, chief economist at CARE Ratings Ltd, a credit analysis and research company, told FactChecker. "It was primarily because of petrol, diesel, tobacco and liquor. These are not part of Goods & Services Tax. Since the government is getting higher revenue, the government is able to spend it on relief work or any kind of social welfare programme. So, we cannot really contest the government here. But when fuel prices go up, it has a serious secondary impact on the economy," said Sabnavis.

The impact of high fuel taxes on the economy was also highlighted by Reserve Bank of India Governor Shaktikanta Das in a recent meeting. During the 27th meeting of the Monetary Policy Committee in February 2021, Das said, "Proactive supply side measures, particularly in enabling a calibrated unwinding of high indirect taxes on petrol and diesel – in a co-ordinated manner by centre and states – are critical to contain further build-up of cost-pressures in the economy."

The rise in fuel prices is increasing transportation costs across the country and even if crude prices drop this may not come down. Considering that almost every single commodity is transported by road at some stage, transportation costs are embedded into all costs.

"Even if the price of crude oil drops, the fare for taxis doesn't come down. This is because they are protecting their standard of living. Hence the transportation costs that get embedded here will not reverse the moment the prices of fuel come down. That is a serious problem," explained Sabnavis.

While seven years ago, crude oil price constituted two-third of the fuel price, now taxes and other levies occupy this pace. "Previously governments have reduced tax rates. Alternatively, oil marketing companies provide certain subsidies by reducing their profit market. But in the current situation nobody is doing that. As crude oil prices increase, fuel prices also increase. So today everybody is profitable except the consumer," he said.

FactChecker tried emailing and calling Pradhan for a comment but did not receive a response. We will update the story as and when we do.

International Fuel Prices

As of June 14, 2021, fuel prices for most neighbouring countries are much lower than India's. In Sri Lanka, petrol costs an Indian equivalent of Rs 68.18 and diesel at Rs 41.49. The price of petrol is comparatively higher in Bangladesh than India's neighbouring countries with petrol prices at Rs 77.78 while diesel is low at Rs 57.04. Prices are lower in Afghanistan with petrol priced at Rs 46.28 and diesel at Rs 48.19.

Full View

Way Forward

The central government has been pushing alternative ways to reduce the cost of fuel prices. Under the National Policy on Biofuels 2018 the government emphasised on achieving energy security of the country with a target of reducing import dependence. The government recently fast-tracked its target for selling petrol with 20% blended ethanol to April 1, 2023.

Under The National Biofuel Policy 2018, the target for blending ethanol stood at 20% for petrol and five% for diesel by 2030. However, Santosh Mehrotra, economist and visiting professor at Centre for Development, University of Bath, UK and former professor of Economics, Jawaharlal Nehru University in New Delhi, said implementation of alternative fuels will take time. "The government is already promoting alternative fuels and electric vehicles. That will take years to implement. There is no logic in increasing fuel prices that are currently in use. The government will need to do more to encourage alternative fuel, conservation of fossil fuels, or electric vehicles. The subsidies for electric vehicles could increase. But this is not the right time to do that, because the central tax revenues are falling on account of the contraction of the economy," he said.

"Right now, is the time to reduce taxes on petrol and diesel, which will also lower the rate of inflation as fuel is an input cost into almost all commodities, which must be transported to reach the consumer," Mehrotra concluded.