Global crude oil prices slumped about 65 per cent in the 21 months from July 2014 through March 2016. In this period, the pump prices of both petrol and diesel dropped only about 15 per cent. The high imposition of Central and State duties and taxes has prevented retail fuel prices from moving in lock-step with the international trend in oil. This has helped shore up the government’s finances as it bets on public investment to spur the economy, even if this fiscal elbow room has been created at the consumer’s cost. However, Union Petroleum and Natural Gas Minister Dharmendra Pradhan has >introduced a new line of thinking on this front , hinting that higher fuel taxation is a conscious ‘strategy’ to protect the people from the shock of paying more as and when crude oil trends reverse. When Atal Bihari Vajpayee’s NDA government had decided to end the Administered Pricing Mechanism (APM) with effect from April 1, 2002, the benefit that could accrue to consumers from market-based pricing was cited as a factor to justify the deregulation of the oil sector. The reasoning then was that dismantling the regime of price controls would open up the sector to increased investment, including from private players, and that with the ensuing competition consumers ultimately stood to gain. However, the past one-and-a-half decades have seen successive governments struggle to find the right balance in dealing with the twin challenges of reining in the subsidies on products — kerosene, LPG and diesel, the price of >which was completely decontrolled in 2014 — and ensuring that fuel prices don’t face too much volatility.
While price volatility is a key concern when international crude prices are climbing, the NDA government has reaped a revenue windfall from the dramatic drop in the price of oil. This has been achieved by a combination of excise duty increases on automobile fuels and a parallel reduction in the subsidy bill. Here, the improved targeting of LPG subsidies via the Direct Benefit Transfer scheme and efforts to widen the voluntary surrender of the subsidy on cooking gas among the middle and affluent classes have both helped. While the desire to use the opportunity to address the fiscal deficit by shoring up revenue is tempting for any government, resorting to the use of any kind of indirect levers to impact fuel prices amounts to a backdoor APM. The Centre’s position that the easing headline inflation reflects the pass-through of lower oil prices doesn’t entirely stack up. While retail inflation as measured by the Consumer Price Index slowed to 4.83 per cent in March 2016, from 7.31 per cent in June 2014, food price inflation decelerated only to 5.21 per cent in March. That transportation costs are a significant factor in food prices and that lower diesel prices can help contain them is well established. The government’s paternalistic argument that it is refusing to pass on the direct benefit of softer global oil prices as a service to consumers does not bear scrutiny.
