Myths about High Petrol and Diesel Prices

There have been a lot of explanations going around on WhatsApp, trying to justify the high petrol and diesel prices in India. Hence, I had to write this piece, although, my original plan was something else. So, without wasting any time, let’s get into it.

High Prices Due to Oil Bonds?

I have previously written a piece telling you why oil bonds are not the reason for high prices. If you haven’t read that, let me explain you in short. Vajpayee government and the UPA government asked the Oil Marketing Companies (OMCs) to sell petrol and diesel at a lower price than the actual cost and to compensate for the loss they would get oil bonds. These bonds would have a maturity date in the future. The argument here is that bonds issued by the previous government have to be paid by the current one hence oil prices are rising.

If we look at the Union Budget, two oil bonds (of Rs. 5,000 crores each) are getting matured this year. Along with that government pays an interest of Rs. 10,000 crore (approx) each year. Thus, the total government expenditure for this year would be Rs. 20,000 crore. In fact, since 2014-15 no oil bond has matured until this very year. The only amount the government had to pay was the interest amount.

Now, excise duty collection from petrol and diesel in 2020-21 was Rs. 3.7 lakh crore. In the first half of last year (the latest data available), the centre had already collected Rs. 1.72 lakh crore which is 33% more than what was collected during the same period in 2020-21.

The expenditure on oil bonds is a minuscule percentage of the revenue government earns from oil. In fact, the total value of outstanding oil bonds as of this year’s budget is Rs. 1.2 lakh crore, which in itself is a small portion of what the government earns in a single year.

India’s Dependence on Imports

India imports most of its oil. “Hence, when the international prices rise, prices in India rise as well” is the argument given But, the import dependence has increased during the Modi era. In 2014, India imported 83% of the crude oil it consumed. By 2019-20, the number went up to 88%. Yes, when an economy grows, consumption of oil grows as well, and if the demand for oil grows faster than the growth of domestic production, our import dependency increases. But, as Aunindyo Chakravarthy writes in a piece,

“The truth, however, is that India’s crude oil consumption growth has slowed down sharply in the Modi years. Between 2013-14 and 2019-20, consumption increased at about 2.2 per cent per year. The rate of growth in the previous six years, between 2007-8 and 2013-14, was 6.7 per cent.”

ONGC, India’s largest OMC, has continuously spent less on oil explorations, in the Modi years. (Here’s my detailed piece on it.)

Also, the price of petrol in Delhi was Rs. 70 in 2013 when the price of the Indian Basket of crude oil was more than $100. In March, the average price of the Indian Basket of crude oil was $112, and the price of petrol was more than Rs. 100.

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Tax Used For Development Projects

Tax is used by the government to run welfare schemes and for the development of the nation, hence ultimately our tax ends up well. Isn’t it? NO.

A tax on petrol is a tax on the poor. This is because a rise in prices of petrol and diesel has an inflationary impact on every other commodity, and even a beggar on the road buys salt and food for himself.

Also, at a time of the pandemic, when people have lost jobs or have seen a reduction in their salaries, it is not good to increase taxes, which will further cause inflation. The economy, as a whole, is also facing a demand-side problem, and increased taxation would further worsen the situation. To add to that, there was no relaxation in income tax for the middle class in this year’s budget.

In 2019, the government slashed corporate tax from 35% to 26% which resulted in a decline in revenue. This increase in tax can also be seen as compensation for that. In toto, we are financing the large corporates.

Fuel Prices Higher in Other Countries As Well

People have started comparing fuel prices of different nations to give an argument that fuel prices are costlier there. This is completely false. In economics, we never compare the absolute prices of any commodity. Since people in other countries have varied purchasing power. Hence, we convert the values in terms of Purchasing Power Parity (PPP).

The LPG price in India is the highest in the world in terms of PPP. Similarly, we stand in 8th position in Diesel, and 3rd in Petrol.

Also, what I am opposing are the taxes on fuel and not the price. Fuel taxes in India are the highest in the world.

Increase in Prices are Lesser as Compared to Other Nations

Petroleum Minister Hardeep Singh Puri recently in Lok Sabha said,

“The surge in fuel prices in India is 1/10th of the price hike in other countries. The prices in the US have increased by 51 per cent, Canada 52 per cent, 55 per cent in Germany and the UK, France 50 per cent, Spain 58 per cent, but only 5 per cent in India,”

It turns out that he is comparing fuel prices across the globe between April 2021 and March 2022. The fact that Mr Puri gave was correct, but the reference was not given. And once we take that into account, the fact has no importance.

The International prices of crude oil went to an all-time low during the pandemic. But, the petrol price in the petrol pumps didn’t change. This was because as the international prices decreased, the government increased the taxes, effectively having no impact on fuel prices. Then, as the international prices increased, the fuel prices at the petrol pump started rising as well. Here comes the twist.

Let’s say everywhere the fuel prices were Rs. 70/ltr before the pandemic. During the pandemic, everywhere else fuel prices went to Rs.30 but remained the same in India. After the pandemic, all countries saw an increase of Rs. 30 due to higher international prices. Now, the new price of fuel in other countries is Rs. 60 (30+30) and has increased by 100% (30/30 x 100). In India, prices are Rs. 100 (70+30), but the prices have increased only by 42% (30/70 x 100).

This is how percentages are being used to justify a wrong. Another point to note here is that the government froze fuel prices from November 2021- to March 2022 for the upcoming state assembly elections (despite a huge jump in international fuel prices).

To conclude, there is no justification for the high fuel prices in India. I termed the government as a stationary bandit, in one of my pieces. And this is true today as well. The government wants to work on setting perceptions, and not on the mess our economy is in today. Obviously, we have to pay for it.

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