When Oil Price Falls, Excise Duty Goes Up. When It Rises, Petrol/Diesel Prices Go Up.

light-diesel-oil-250x250Petrol and diesel prices have gone up. This time the prices were increased by the oil marketing companies(OMCs).

The Indian Oil Corporation (IOC), one of the OMCs, said in a press release that it has decided to “increase in Retail Selling Price of Petrol by Rs. 3.07/litre at Delhi (including State levies) with corresponding price revision in other States.”

At the same time, it has decided to increase the “Retail Selling Price of Diesel by Rs. 1.90/litre at Delhi (including State levies) with corresponding price revision in other States.” The increase came in effect from the midnight of March 16-March 17, 2016.

The price of oil has been going up over the last few weeks. As on February 11, 2016 the price of the Indian barrel of crude oil was at $26.95 per barrel. Between then and March 16, the price of the Indian basket of crude oil has gone up by 34% to $36.10 per barrel.

In rupee terms also the increase in prices has been more or less similar. The price of one barrel of crude oil has one up by around 32.7% to Rs 2431.94.

This increase in price has forced the oil marketing companies to increase the price of petrol and diesel. As the IOC said in its press release: “The current level of international product prices of Petrol & Diesel and INR-USD exchange rate warrant increase in price of Petrol and Diesel, the impact of which is being passed on to the consumers with this price revision.”

In any other market this would have been a fair deal. If the price of the input goes up (i.e. oil in this case), the price of the output (i.e. petrol and diesel in this case) goes up as well. But the Indian oil products market is anything but fair.

When the price of oil was falling, the central government and the state governments captured the major portion of the fall, by increasing taxes which are built into the price of petrol and diesel. Since November 2015, the central government has increased the excise duty on petrol and diesel, five times.

This basically means that when the oil price falls, the governments capture the major part of the benefit. But when they go up, the consumer has to pay for it. How is this fair in any way? Also, what happens if oil prices continue to go up, will the entire increase in price be continued to be passed on to the consumers? If the government did not pass on the total fall in oil prices to the consumer, it is only fair that it doesn’t pass on the entire increase as well.

The point being that the consumer has to pay both ways, when the prices come down and when they are going up.

One logic offered by those who like to defend the government on anything and everything, is that the money coming in through the increase in excise duty on petrol and diesel, is being used for farmers. This conclusion possibly comes from the tone of the finance minister Arun Jaitley’s budget speech. But is this true?

Economist Ashok Gulati exposes this sleight of hand by the government in a column in The Indian Express. As he points: “The allocation for the Department of Agriculture, Cooperation and Farmers’ Welfare (DoA), is raised from the revised estimate (RE) of Rs 15,809 crore in FY16 to a budgeted estimate (BE) of Rs 35,983 crore for FY17, a whopping increase of 127 per cent! This would make anyone jump and conclude what a wonderful stroke the finance minister has played for farmers. But hold on. There’s a catch. Much of the increase (Rs 15,000 crore) is due to interest subsidy on short-term credit. Earlier, this subsidy was Rs 13,000 crore and was shown under the Department of Financial Services. Now, it’s transferred to the DoA.”

So where is the money raised through the increase in excise duties and the money saved because of a fall in oil prices essentially going? Jayant Sinha, the minister of state in the finance ministry, recently explained this in a written reply to a question in Lok Sabha.

Details of Subsidies (Rs. in crore)

Subsidy 2012-13 2013-14 2014-15 2015-16 RE
Food 85000 92000 117671 139419
Fertilizer 65613 67339 71076 72438
Petroleum 96880 85378 60269 30000
Other 9586 9915 9242 15944
Total 257079 254632 258258 257801
RE=Revised Estimates

Source: http://pib.nic.in/newsite/PrintRelease.aspx?relid=137493

Take a look at the above table. The petroleum subsidy has fallen from Rs 96,880 crore in 2012-2013 to Rs 30,000 crore in 2015-2016. The OMCs currently suffer under-recoveries every time they sell kerosene and domestic cooking gas. In March 2016, the under-recovery on kerosene stood at Rs 6.58 per litre. The government compensates the OMCs for these under-recoveries and this shows up under the petroleum subsidy head.

Despite the fall in petroleum subsidies, the total subsidy bill of the government has barely changed. It has slightly increased from Rs 2,57,079 crore in 2012-2013 to Rs 2,57,801 crore in 2015-2016.

What the table shows clearly is that the fall in petroleum subsidies has been more or less been made up for by an increase in food subsidies. The food subsidy bill of the government has jumped from Rs 85,000 crore to Rs 1,39,419 crore.

As I have discussed in previous columns, the food subsidy regime in India is very leaky. A major portion of the rice, wheat and sugar which are distributed through it, are siphoned off, by the owners of the fair price shops through which the distribution takes place. The government is trying to plug this leak by ensuring that in the days to come, the subsidy is paid directly into the bank account of the targeted beneficiaries.

As Sinha said: “In cash transfer, the benefit is transferred in the beneficiary’s account, preferably Aadhaar seeded. Presently, LPG subsidy is transferred directly in to the bank accounts of beneficiaries. Food subsidy in cash is disbursed in wo Union Territories viz, Puducherry and Chandigarh, directly in beneficiaries’ bank accounts, in kind, after biometric authentication, in 70000 fair price shops at present.”

The government also has plans to pay out fertilizer subsidy directly during the next financial year in a few districts across the country on a pilot basis. This is a good move and I sincerely hope that the government meets more and more success on this front. The subsidies will reach the intended beneficiaries and will benefit the Indian economy in the process.

The column originally appeared on Vivek Kaul’s Diary on March 18, 2016

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About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

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