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Rising Oil Price

Rising Oil Price

The all-time friend of Prime Minister Narendra Modi seems to have got angry. And that too without any signs of being tamed. The crude prices that dipped to as low as USD 28 a barrel in January 2015 have shot up to USD 83 a barrel as on October 2, 2018. To add fuel to fire, the Indian Rupee has also weakened, increasing the purchasing price.

Ever since May 2017, the crude prices have been increasing gradually. However, since August 16, 2018, the fuel cost has crossed the highest point during the UPA regime. So much so, the petrol price has crossed Rs. 90 in some places. It is all set to touch the century mark if the government does not step in.

Despite the steep increase, the central government has not shown any signs of announcing a price cut so far. This seems to be a tough stand, considering the fact that India will go to the Lok Sabha polls next year.

Meanwhile, the opposition has taken charge and has decided to take on the Modi government on every front. Be it Rafale, LIC bailing out debt-ridden ILF&S, or petrol price, the government is being attacked on a regular basis. The blame game has already started.

The Congress-led opposition wants oil prices to be reduced, by hook or by crook, showcasing itself as the Messiah, in the hope of garnering votes. On the other hand, the NDA government blames the UPA for the current fiscal mess.

The official twitter handle of the BJP government claimed that Modi government paid off the unpaid bills of oil bonds worth Rs. 1.3 lakh crore. The twitter post reproduced what the then prime minister Manmohan Singh had said about the increasing oil prices in the year 2012. “The subsidy on petroleum products has grown enormously. Where would the money for this have come from? Money does not grow on trees”.

The tweet also quoted Manmohan Singh as mentioning that issuing oil bonds is not a permanent solution in the year 2008. “We are only passing on our burden to our children, who will have to repay this debt”. Using this quote, the BJP government has claimed that it paid off the pending bills with interest because “we should not burden our children”.

Not only this, the petroleum minister Dharmendra Pradhan, said we also paid Rs. 70,000 crore towards interest. “In total, we (govt) discharged our responsibility by repaying over Rs. 2 lakh crore”.

However, Boomlive, an independent digital journalism agency, laid bare the facts. The report showed that it is a fact that the UPA issued oil bonds worth Rs. 1.44 lakh crore for mitigating the immediate financial loss for funding the under-recoveries of the oil marketing companies (OMCs). 

However, only two bonds worth Rs. 3,500 crore matured during the current government’s term. The outstanding balance of Rs. 1.3 lakh crore remains the same since 2014-15, as the government did not issue new bonds. The next lot will mature in October and November 2021 amounting to Rs. 5,000 crore each. If the current government continues after the 2019 elections, even then, it would not have to pay Rs. 1.3 lakh crore, as per the maturity instructions.

Now the question is whether these bonds can be paid in advance. The answer is a big “No” as the government prepares its budget on a cash basis, not on an accrual basis.  This means the government will budget only for items that are due in the current year. Besides, why a government, that is barely able to maintain its fiscal prudence, would pay its liabilities before the maturity period?

Hence the claim that the higher prices helped the government in repaying its debts is not at all true. But then why prices are the highest in India, as compared to the neighbouring Pakistan or Myanmar, where petrol price is around Rs. 60 and Rs. 41.92 respectively. 

The answer lies in the complex tax structure on petroleum products. The Modi government had a windfall gain when the crude prices went down to as low as USD 28 a barrel during 2014-15. The average crude prices have been rising year on year but it has not touched USD 111 per barrel, the highest during the UPA regime. The average price during 2015-16, 2016-17 and 2017-18 was USD 46, USD 47 and USD 56 per barrel respectively.

The government did not pass on the benefit to the end consumer. Instead, the excise duty was increased manifold. While in May 2014, a consumer paid 31 per cent towards taxes while purchasing a litre of petrol, the composition has drastically increased to 45 per cent in September 2018. This has been calculated based on the petrol prices in Delhi. In states like Maharashtra, where VAT is comparatively higher, the tax component will clearly be higher. Also, the VAT that is levied is ad-valorem. It means it will increase with the increasing cost. 

The petroleum sector alone contributed Rs. 18 lakh crore to the exchequer from 2014-15 to 2017-18 as per the petroleum planning and analysis cell. Out of this, Rs. 11 lakh crore went to the Centre while the rest was distributed to the state governments. Certainly, the oil marketing companies have benefited during these years. Not only their profits but also their capacity to pay a dividend to the government has considerably increased.

In other words, while the retail consumer is facing the ire of high prices, the government and OMCs are actually making money. But then the government has no option. Neither the Centre nor the state governments are willing to reduce the taxes as their revenue has decreased considerably ever since the goods and service tax (GST) was launched.

The cash-strapped BJP government does not have an option. If it reduces the taxes, it will have to print more money to meet the expenses of social welfare schemes, throwing fiscal consolidation to the winds.

Also, barring petrol and diesel, other fuels like kerosene, natural gas, liquefied petroleum gas, are not market-linked. In terms of volatile oil prices, it is extremely difficult to manage prime minister’s pet scheme –Ujjwala, which is highly subsidy driven. The government might have campaigned and motivated the consumers to give up their subsidy but the fact is that around 50 million consumers have been added since the launch of Ujjwala scheme. The government intends to add on another 30 million households by 2020 in the remote regions of the country.

It is good to see that women are moving away from the traditional fuels like wood, charcoal etc., but the cost of delivering these cylinders to the remote areas will be considerably higher. Also, the consumers under Ujjwala scheme are very poor. The moment they are asked to pay full cylinder price, they may switch back to the traditional ways of cooking. In other words, the government will have to bear the subsidy burden for the coming years as well. 

Given this scenario, the complex taxation structure on transport fuels is likely to stay for a longer time. In case, transport fuels are also brought under the GST, which would have been an ideal situation to deal with the rising fuel prices, the government will not have much to spend on the welfare schemes.

Simply put, the Modi government is in a fix. Considering an election year, it would have ideally reduced the petrol prices to win votes. But it cannot put the welfare schemes at risk as well. For, it is the poor, who get lured by the pre-election doles. 

As far as petrol is concerned, the government so far is adopting the strategy suggested by the union tourism minister Alphons Kannanthanam: “Who buys petrol? Somebody who has a car, bike. Certainly, he is not starving. Somebody who can afford to pay has to pay."

Or the recent strategy as propagated by union minister Ramdas Athawale: “I am not suffering from rising fuel prices as I am a minister. I get it for free.” Whatever be the strategy, it’s not going to work. Comparatively, the then Prime Minister Manmohan Singh’s plea that money did not grow on trees, would perhaps have a greater weight.  

(The writer, a company secretary, can be reached at

(Published on 08th October 2018, Volume XXX, Issue 41)