High fuel prices: the method in the madness

In March 2017, an Indian National Congress (INC) spokesperson slammed the ruling NDA government “The ordinary Indian is being ripped apart by Modiji by midnight extortion as LPG cylinders hiked by Rs … Are these ‘Achche Din?'”. In April, WB Chief Minister retorted with a similar statement. In September, when the fuel prices hit new highs, another INC spokesperson asked “Modi government is ripping the common man. Don’t they qualify better for the label of ‘economic terrorists’?”

Is there a fair point in what they are saying? One needs to ask this question and understand the facts behind the issue, as we are talking about statements of politicians. Let us be sure, they were talking about the price hike of ‘non-subsidized’ LPG cylinder, as the subsidy on LPG cylinder to the eligible beneficiaries is not withdrawn – at least not yet. The price of Petrol has remained market determined since 2010 without any subsidy and the subsidy on Diesel price was withdrawn in October 2014.

Over decades the subsidies on Petroleum products had become a major component of Indian Government’s expenditure, leading to unavailability of those much needed funds for the growth and development activities.

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What lead to ballooning of the total subsidy to a high of Rs.1,64,409 crores in FY 2012-13? One needs to understand the complete background of this colossal problem that the Indian government has been nurturing over decades. Once we are there, it would be easy for anyone to fathom the unfolding story of how the current NDA government has been taming this monster.

To understand and appreciate this gargantuan problem, we need to look into the issues related to domestic LPG and other fuels (petrol, diesel and kerosene) separately and in detail.

The LPG Problem & Reforms Measures

An analysis of the LPG connections and consumptions pattern early in this decade revealed that those in the urban areas who constitute just 20% of the Indian population and in the higher income group, disproportionately received over 60% of the total amount of the LPG subsidies. Sadly, the bottom 20% who constitute the poorest segment of the population who lived in the rural areas received just 1% of this huge LPG subsidy expenditure. And many in the rural area were not benefitted at all, since over 80% of the rural households didn’t have a LPG connection at all.

In view of this and the ballooning subsidy bill on petroleum products, the Ministry of Petroleum & Natural Gas constituted an Expert Group under Shri K. Parikh in June 2013. The Expert Group recommended a set of reform measures in its report [pdf]. Despite their recommendation to reduce the number of subsidised LPG cylinders per household to 6, this cap which was initially reduced to 6 in 2012, was increased to 12 again in 2013 in view of the upcoming general elections and that too when the crude oil price was nearing a all time high.

This increase in number of subsidised cylinders and that too when the estimated average under-recovery per cylinder rose to a whopping Rs 762.70 per cylinder in January 2014 (up from Rs 542.71 in Dec 2013) was termed as a grave mistake as it resulted in the monthly subsidy bill hitting the roof. This was further aggravated due to effects of depreciation of Indian Rupee and persistently strong average cost of Indian crude oil basket. The huge under-recovery in petroleum products by the OMCs year-on-year, lead to the total debt rising to Rs 4.13 lakh crores, which was unsustainable.

With a potentially explosive Fiscal situation, the NDA government lost no time in implementing the recommendations of the Expert Group with all sincerity and vigour, once they took charge.

  • Honourable Prime Minister Narendra Modi, in March 2015, appealed to the citizens to give up subsidy voluntarily with a “Give It Up” campaign so that subsidized connections can be given to the poor. Over 1 Crore had given up voluntarily till April 2016.
  • In May 2016, the PM also announced the Pradhan Mantri Ujjwala Yojana (PMUY) through which Rs.1600 subsidy will be given to each poor household to avail an LPG connection. :
    • Over 2.5 crore connections were given till July 2017 to the poor households, against a target of 5 crore in 3 years, making this scheme a roaring success. This raised the national LPG coverage to 70%.
    • The LPG consumption registered a robust increase to 19 MT by December 2016 from 15.6 MT in March 2013.
  • Direct Benefit Transfer (DBT) to a Aadhar linked bank account was made mandatory to receive the LPG subsidy, and the final deadline was October 31, 2016. This step eliminated leakage of this benefit by stopping illegal diversions.
  • By applying a Rs.10 lakh income ceiling and further scrutiny of irregular and duplicate connections among existing ones, a total of 3.34 crore spurious connections were eliminated.
  • The price of subsidized LPG cylinder was allowed to be increased gradually by Rs.2 every month, instead of every 6 months. The price of non-subsidised cylinder was made market determined and hence came down from a high of Rs. 1,234 in January 2014 to Rs. 607 on September 2017 (for Chennai).
  • The above approach narrowed down the price gap between subsidized and non-subsidized cylinders to just Rs. 132, thereby reducing the overall subsidy burden. Simultaneously, this has rewarded those who opted to give up subsidy.
  • Above everything else, importantly, the under recoveries on LPG alone – meaning the hit that the Oil Marketing Companies (OMC) had to take up due to administered pricing – has reduced from a high of Rs.46,458 crores in 2013-14 to Rs. 36,580 crores in 2014-15 and further to just Rs. 18 crores in 2015-16. IT WAS NIL in 2016-17 !!
  • The total subsidy on LPG – i.e the budget provisions plus under recoveries – reduced to Rs.20,023 crores in 2016-17 from a high of Rs.53,596 crores in 2013-14. The whole of this amount is supported by the budget. Chances are, this will be much lower in the years to come, but may not go away completely any time soon.

The Case of High Fuel Prices

The international crude prices crashed in 2015-16 after remaining well above $80 between 2009-14. So also, the Indian basket of crude oil prices remained high and hit an 11-year low of $37.34 a barrel in 2016 and remained at around 1/3rd of the all time high. The NDA government grabbed this golden opportunity for covering the fiscal deficit and improving the health of the government finances rather than to give short-term benefits to the Indian consumers.

The excise duty on Petrol and Diesel was increased from Rs.9.48 and Rs.3.56 in April 2004 to Rs.21.48 and Rs.17.33 in March 2016, respectively. This roughly works out to 44% and 55% of the retail cost of a litre of Petrol and Diesel, respectively. Due to this increase in excise rates, the GoI’s revenue through levy of excise duty on petrol and diesel has more than tripled in the three year period between 2013-14 and 2016-17 from Rs.77,982 crores to Rs.242,691 crores.

Also, the reduced base price of the fuel meant lower revenue to the states. Hence several states resorted to steep hikes in the VAT. In 2014 only 10 states had a VAT of more than 20% on diesel, but by August 2017, this has increased to 15. In 2014, Chhattisgarh had the highest VAT of 25% but by March 2017, it was Andhra Pradesh that had the highest rate of 31.06%.

In 2014 only 17 states had a VAT of more than 25% petrol, but by August 2017, this has increased to 26. In 2014, Punjab had the highest VAT of 33.06% but by March 2017, it was Maharashtra that had the highest rate of 48.98%.

The revenues from petroleum products shot up due to the impact of the above measures as shown clearly in the graph above.

But those who lament that the petrol and diesel prices are very high in India compared to the neighbouring countries and that the taxes are higher than even the developed countries, would understand that they were looking at a biased picture once they see the holistic comparison presented below. The prices of fuels in Delhi are taken for comparison.

One cannot but notice that while in some of the neighbouring countries the petrol and diesel prices are lower, that is more than compensated for high LPG and Kerosene prices.

Objectives fulfilled

It is clear that the GoI orchestrated a high excise duty mop up but is it justified in doing so? Absolutely, Yes. This determinate action by the present government can be appreciated, if one understands what good this has done to the Indian Economy, by reading the facts presented here.

  • SUBSIDY : The total budget and non-budget subsidy support for the petroleum products including Petrol, Diesel, Domestic LPG and Kerosene that was Rs.41,605 crores in FY 2005-06, went up and touched an unsustainable high level of Rs.1,64,409 crores in FY 2012-13. Within three years hence, it fell to Rs.27,618 crores in FY 2016-17. This couldn’t have been possible without the aggressive and innovative measures towards reducing subsidies on Domestic LPG, Kerosene and Diesel.
  • FISCAL DEFICIT : The health of India’s budget under the current government improved considerably by scoring deficit of 3.5% of the GDP in FY2016-17, from a historical low of 6.5% in 2009-10. For FY 2017-18 it is estimated at 3.2% with a possibility of gliding towards 2.5% by 2022, should other factors converge favourably. The additional revenue from taxes on petrol and diesel has aided in achieving this.

  • INFLATION : Usually a hike in the price of fuel in the hands of the consumers should stoke fears of inflation. On the contrary, government has managed to bring down the CPI (inflation) from a high of 10.91% in 2013 to an average of 1.90% by July 2017, without any reason to fear a major spurt from here on unless a global event results in crude oil price to shoot up.
  • CONSUMPTION : The PPAC data of petroleum products shows that the consumption of petrol and diesel has grown 5.3% on the average during the three year period from 2014-2017, despite at a slower rate in the 4 months after the announcement of Demonetisation. This clearly indicates that the consumers are not too much worried about the additional burden due to the increase in the price of these fuels. Further, a lack of any major and sustained protests or general strike against the higher fuel prices during the last 3 years reinforce the belief that the Indian public trust and support the initiatives of the GoI.

  • CAPACITY : An increase in consumption of petroleum products necessitates an augmentation of refining capacity. The commissioning of the IOL’s refinery in Pradip, Odissha, has increased the country’s total refining capacity by 15 MMT or 7%, making India the second largest in Asia after China. This refinery, missed several deadlines due to various reasons, was dedicated to the nation in February 2016 by the Hon. Prime Minister.
  • FOREX : In September 2017, India’s Forex reserve has topped USD 400 Billion for the first time. This would give RBI enormous strength in tackling currency fluctuations should any unexpected global events rattle the global markets.
  • Health of OMCs : With the elimination of under-recovery from 2015-16, the Oil Marketing Companies have become profitable. But the over Rs.900,000 crores worth of Oil Bonds with a high interest rate of around 8% issued over the last 9-10 years in lieu of the under recovery, are a huge burden that need to be tackled by the current government.

To summarize, the taming of the LPG subsidiary monster is nothing short of a wonder that demonstrates the systematic and goal-oriented approach of the current government. This success will leave much elbow room for the government going forward to look at the growth and development aspects, leaving the subsidy problem behind.

Petroleum Products under GST

Now if one asks when and how will the prices come down, the answer is ‘a bit difficult to predict’.

In December 2016, the Chief Economic Advisor Dr.Arvind Subramaniam announced that though constitutionally the petroleum products are within the ambit of GST, it will be kept out of GST dispensation for sometime after GST goes live. This was the decision of the GST Council as the State Finance Ministers who are part of the council found it necessary to protect the revenues of their states as a substantial part of their revenues were from the petroleum products including petrol and diesel. This apprehension sounded reasonable considering this : though GST is a major reform that is expected to result in better tax compliance and an increase in tax revenues for both the center and the states, the uncertainty in that cannot be discounted.

Recently in September 2017, when questioned about the high taxes on petrol and diesel, the Union Minister for Petroleum and Natural Gas, Mr.Dharmendra Pradhan expressed hope that they would be brought under GST soon. This statement, when read with the fact that Excise Duty for petrol and diesel has not been increased since nearly 18 months after March 2016, helps in deducing that the GoI has already achieved its short term objectives and hence ready to bring the petroleum products under GST ambit at the earliest. But that decision clearly rests with the council. Hence the central government cannot be blamed for the prolonged high prices for these fuels at the hands of the consumers.

The call for a reduction in the fuel prices is quite reasonable as it pinches the purses of the common man resulting in lower savings. It appears that reasonable GST tax revenue realization in the first 4-5 months after the GST went live will convince the states to agree for bringing the petroleum products under GST. How about from January 2018 ?

Preparations for the next decade

The present Indian Government has not stopped with the above achievements that might help in making the economy better in the short term but has spelt out its policies that it wants to promote to protect its economy from potential future shocks from crude oil. The crude price has remained low and favourable to India since mid 2014 but may not remain so forever.

  1. In 2016, the Hon. Prime Minister has set a goal to the Ministry for Petroleum and Natural Gas for reducing Crude oil imports by 10% by 2022.
  2. The Union Minister for Road Transport and Highways (MORTH) has recently reinforced this by calling manufacturers to reduce the growth of cars, particularly diesel cars, and replace them by those running on a more sustainable fuel like electricity or ethanol.
  3. Also MORTH has charted out a plan for promoting electric propulsion for public transportation. This, when implemented in a sustainable and time-bound manner, should contribute reducing fossil fuel consumption.
  4. Extension of the metro rail services in the cities where they are already operating and faster completion in over a dozen cities where they are under construction or planned should motivate the public to abandon their personal vehicles and switch over to Metro services.

These lofty goals, if properly planned and achieved, will server as firm steps in India’s endeavour towards achieving energy security.

References :

I am an Information Technologist by profession and a freelance blog writer. Interested in topics India’s national interest, science, nature, religion and everything else about the universe.

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