Fuel prices don’t need to rise: The Tribune India


Aunindyo Chakravarty


Senior Economic Analyst

FUEL prices have been rising almost daily for over a week now. The bumps are small, 80 paise at a time. The philosophy of rising gas prices seems to have been informed by a standard marketing ploy. Keep the number below a round number and it will look less than it really is: just like Rs 99.99 seems to be closer to Rs 90, even though it is almost Rs 100. Creeping increases also borrow from the playbook of smart HR services faced with big downsizing goals. They let people go, drop by drop, for several months. It has the same impact as a one-off sacking of a large number of people, but keeps the entrenchment out of the news.

The easiest way for the government to keep fuel prices from rising is to reduce taxes on them, and by taking fewer dividends on oil PSUs.

In any case, most people expected their fuel bills to rise significantly after the UP elections were over. It shows that no one believes gasoline and diesel prices have been truly deregulated. Only a nudge from above, caused by electoral calculations, can explain why oil marketing PSUs have held fuel prices down for more than four months, even though the rupee cost of the Indian crude basket – the crude that Indian refineries are buying – had soared 19 percent. hundred during this period.

True deregulation would have meant that fuel prices would have risen as the cost of crude rose. So if the oil marketing companies were to increase fuel prices in line with the change in crude prices, we would have had to pay 18 rupees more for a liter of petrol than what we paid in November . This means there is still a long way to go before fuel prices catch up with the cost of crude.

But do gasoline prices really need to rise? No, they don’t. To understand why, we have to take a detour to the price of fuel in India. Although petrol and diesel are technically deregulated, their market prices are administered. This is done through a process called Trade Parity Pricing (TPP), which is an 80/20 combination of the cost of importing gasoline and the price companies can get if they export it.

The formula used to calculate this uses the cost of buying gasoline in a port city, the cost of transporting it, the cost of shipping insurance, port charges, and customs duties. Now remember that all of these costs are imputed, as there is no actual import of gasoline. India is a refinery surplus nation that produces more fuel than it needs and exports a large amount of it. So, even though the refiners have not paid any of the costs that actual imports would incur – shipping, postage, insurance and customs duties – they are all considered legitimate costs of producing oil in India. It is nothing more than an assured price, a form of protection granted to refineries. No economist ever questions this inherent refinery protection, even when attacking the so-called “price distortion” effect of the MSP afforded to farmers.

It could be argued that crude is the most important cost to refineries and therefore it makes sense to tie gasoline prices to changes in the price of crude. However, this argument ignores two things: firstly, India’s lower refining costs, and secondly, the fact that Indian refineries are among the most complex in the world, which not only allows for the least expensive products to be refined. expensive and the most “sour”. ‘ available on the market, but can also quickly adjust their production mix to maximize their margins. At a time when world prices have skyrocketed, the government should set the maximum profit margin a refinery can be allowed to make.

In fact, at times like this, the government should restrict the export of fuel and other petroleum products. This will force refiners to sell their output on the domestic market, removing a reason to grant them guaranteed prices at trade parity. Governments are never hesitant to ban exports of agricultural products when prices suddenly rise, so there is no reason not to do the same when it comes to gasoline and diesel. Oil marketing companies have made big profits as crude prices have fallen in recent years. Now is the time for them to moderate their earnings expectations.

Of course, the easiest way for the government to keep fuel prices from rising is to lower fuel taxes and take fewer dividends from oil PSUs. In 2020-21, the Center obtained

Rs 4.5 lakh crore in taxes and dividends from the oil sector. This accounted for 28% of its total revenue that year. The Center can easily reduce this reliance, especially now that the economy is beginning to emerge from its Covid-induced downturn, and reduce excise duties on petrol and diesel.

How will it make up for the shortfall in tax revenue? There are two ways to do this. The first is to increase the budget deficit and finance spending through borrowing. This will benefit the rich, because increased government borrowing is nothing but an equivalent amount of additional savings for the rich. The second way to raise revenue is to increase direct taxes on the wealthy, whether through higher tax rates, surcharges, a wealth tax, or higher capital gains taxes. beyond a certain threshold. Ideally, the shortfall caused by fuel tax cuts should be made up by a combination of higher borrowing and higher taxes on the wealthy.

This means that if the government wishes, you and I won’t need to pay more at our local gas pump, even if crude prices go up. They can be kept stable by freezing retail prices and adjusting them by reducing government revenues and oil company profit margins. This is especially necessary for diesel, which is used for public transport, freight, water pumps on farms and to power generators in factories. Allowing fuel prices to rise further will lead to runaway inflation and stall India’s economic recovery after two long years of battling Covid.

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