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ECONOMY:
OIL PRICES
On
Fire Again
Global
oil prices are flaring and a hike in diesel, LPG and kerosene prices is
imminent. Here's why you will pay more than rising global prices warrant.
by
Rohit Saran
What
do you do when you have to recover Rs 3 from somebody? Simple. You ask
the person for Rs 3. Well, maybe not. If you were the Government of India
you would ask for more, maybe Rs 4 or even Rs 5.
Illogical
as it may sound, this is exactly what happens every time the government
revises the prices of petroleum products to bring them closer to global
prices. Only now, when the stage is set for another hike in petroleum
prices, the logic of such pricing is being questioned by the Union Petroleum
Ministry.
To understand
the logic behind the illogic, let's delve a little deeper into the petroleum
pricing structure. At current prices, diesel is subsidised by Rs 3 a litre,
LPG by Rs 163 a cylinder and kerosene by Rs 5-6 a litre. Petrol is overpriced
by about Rs 2.50 a litre to partly offset the cost of subsidy on other
products. A cabinet decision of November 1997 had mandated the Petroleum
Ministry to adjust diesel prices so as to keep them on a par with global
prices. That, in effect meant a green signal for the elimination of the
subsidy on diesel.
Given this
backdrop, an unsuspecting mind would assume that diesel prices would go
up by Rs 3 a litre to bring them on a par with the price of imported diesel.
But that would have been the case if the cost of crude oil was the only
determinant (or even the predominant determinant) of the retail price
of diesel or petrol. That's not the case. In most parts of the country,
taxes-both Central taxes like excise and customs and state levies like
sales tax-are the largest component of the retail price of most petroleum
products. In Mumbai, for instance, nearly 52 per cent of the retail price
of diesel (Rs 8.75 out of Rs 16.91/litre) is accounted for by taxes.
The sales
tax on diesel in Mumbai is 34 per cent (in Delhi it is 12 per cent). That's
in addition to the 25 per cent customs duty and 16 per cent excise duty.
Similarly, the excise duty on petrol is 32 per cent, customs duty is 25
per cent and sales tax is 27 per cent in Mumbai. Over the years, while
the share of state taxes in the price of petroleum products has increased
that of crude oil has declined. Petrol prices in Delhi rose by Rs 2 a
litre in January this year after a hike in sales tax from 12 to 20 per
cent. This is broadly in trend with European countries. In France, for
instance, taxes accounted for almost 80 per cent of diesel prices, before
an agitation by transporters brought the taxes down marginally on September
13.
If taxes-and
not the cost of crude oil-are the largest component of retail prices,
why are there such apprehensions over the rising cost of crude? The fears
stem from the fact that taxes on petroleum products are ad valorem, that
is, they are fixed as percentages of the value of the crude. So every
time crude prices go up, tax payments in absolute terms also rise, leading
to a higher increase in retail prices. So if the basic cost of diesel
is raised by Rs 3 a litre to eliminate the subsidy, the retail price in
Mumbai would rise by up to Rs 4.80 a litre. The government pockets the
Rs 1.80 extra burden borne by the consumer. No wonder, the Central Government's
collections from taxes on petroleum products are expected to exceed its
target of Rs 25,000 crore by over Rs 10,000 crore during the current financial
year. That's more than the present oil pool account deficit. State governments,
whose revenue from sales taxes rises every time prices of LPG, diesel,
petrol or kerosene is increased, will too receive windfalls. That is exactly
what in the offing. As Petroleum Secretary S. Narayan points out: "Given
the levels of subsidies on kerosene, diesel and LPG, we would like to
increase the prices of all the three."
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If
the markets don’t recover in the next 48 hours expect the worst, says
V Shankar Aiyar in 
