UPA's Policies Cannot Explain High Oil Prices Today; Centre Must Cut Oil Taxes

Indian governments, both at the Centre and states, love taxing oil like nobody’s business. It makes sense. There are no compliance costs to extract this price, the commodity is essential to day-to-day life of individuals and businesses and when every government of every political hue is in on the ‘loot’, it’s easier to continue with the extortionate taxes.

One would be fine if the politicians in power simply accepted this fact with honesty rather than furthering one farcical justification after another to defend the indefensible.

In June this year, the then Oil and Petroleum minister Dharmendra Pradhan said that while he accepts “that current fuel prices are problematic for people but be it the central or state government, over Rs 35,000 crores have been spent on vaccines in a year. In such dire times, we're saving money to spend on welfare schemes.”

The situation is not so dire. India recorded GST collections of over Rs 1 lakh crore for straight eight months before it fell to Rs 92,000 odd crores in June but rose again to Rs 1.16 lakh crore in July. In fact, in the first three months of FY2022, the Centre has met 26 per cent of the target of its own budget estimates of GST collection. Right on track.

Yes, there was dire problem last fiscal due to Covid-19 (and the year before that due to falling GDP growth) but even in a pandemic year, the Centre realised total excise duty of Rs 3.9 lakh crore from oil, a 77 per cent jump from the previous year’s Rs 2.2 lakh crore. This, when the consumption of oil contracted by 10.6 per cent during the year due to lockdowns and slowdown.

Of course, the rationale of taxing to death a critical resource (as oil is to economy) to bridge fiscal deficit when the economy is beginning to recover is beyond oneself.

Pradhan also offered another excuse. In February this year, during the Parliament’s question hour, he said that “When the international price of crude oil is higher, we have to increase the prices and when the international price is lower, we have to decrease the prices here too. This is a market mechanism which is followed by oil marketing companies. We have given the freedom to them.”

The same market mechanism and freedom goes for a toss whenever elections are around the corner. Oil prices are frozen at regular intervals on the government‘s direction during elections — whether it was during 2017 assembly elections in Punjab, Goa, Uttarakhand, Uttar Pradesh and Manipur in April, Gujarat in late 2017, Karnataka election in 2018 or general elections in 2019; and before the elections in West Bengal, Puducherry, Assam, Tamil Nadu and Kerala earlier this year.

Now, Union Finance Minister Nirmala Sitharaman has come up with a novel excuse. That the previous UPA government’s bad decisions are behind high oil prices.

In fact, it’s not so novel. The same argument was made when the global crude oil prices crashed after Modi government came to power but the taxes were raised and the benefits were not passed on the consumer. "Congress party (government) purchased oil bonds of Rs 1.44 lakh crore that we (NDA govt) inherited. Not only this, we also paid Rs 70,000 crore on interest part alone. In total, we (govt) discharged our responsibility by repaying over Rs 2 lakh crore,” Pradhan had said in 2018.

“If I did not have the burden to service the oil bonds, I would have been in a position to reduce excise duty on fuel,” Sitharaman said. “Previous government have made our job difficult by issuing oil bonds. Even if I want to do something I am paying through my nose for the oil bonds. A significant amount is going for interest payment and principal repayment. What unfair burden on me,” She added.

But the truth is that the interest on oil bonds paid in the last seven years amounted to Rs 70,195.72 crore i.e. around Rs 10,000 odd crores each year. It is estimated that an increase of Rs 1 as oil tax adds about Rs 13,000 crore to the government’s tax kitty.

How much has the government increased the taxes in rupee terms? Central excise on petrol jumped from Rs 10.38/litre in March 2014 to Rs 32.98/litre today. For diesel, the increase in excise was even more, going from Rs 4.58/litre to Rs 31.83/ltire.

As far as VAT is concerned, for Delhi, it increased from Rs 11.9/ltire in 2014 to about Rs 18.94/litre for petrol and for diesel it increased from Rs 6.41/litre to Rs 10.8/litre from 2014 to today. That’s an increase of Rs 29.64 in petrol taxes (both excise and VAT) and Rs 31.64 in diesel taxes. (Centre’s additional excise alone is Rs 22.6 and Rs 27.25 per litre for petrol and diesel respectively)

No wonder that the central government’s revenue from oil taxes has gone up from Rs 53,000 odd crores in FY2014 to Rs 3.9 lakh crores in FY2021, increasing seven times in such a short period. This is because, between FY15 and FY20, excise duties were raised a record 12 times and lowered only twice.

The extra revenue earned by the Centre in just 2020-21 fiscal year alone (due to increase in excise duties - Rs 1.8 lakh crore) was not only enough to pay off the principal amount of Rs 1.3 lakh crore owed from UPA era oil bonds but also enough to pay for the last seven years of interest payments paid in lieu of those bonds (well, almost).

Sitharaman’s complaint is thus economical with truth. At the very least, she should go back to pre-pandemic oil taxes and cut excise by Rs 13 for petrol and Rs 16 for diesel. For FY2022, the Centre has estimated to net Rs 2.75 lakh crore from oil taxes, i.e. a good Rs 1.15 lakh crore less compared to last year. That means, at the very least, a reduction of Rs 9-10 for both petrol and diesel can be done without disturbing the financial math.

There is absolutely no justification to continue with such extortionate oil taxes. Global crude oil rate is moderate, dollar-to-rupee exchange rate is more or less the same as before, oil marketing companies are not under heavy debt or financial stress or making losses, fuel subsidies are far from a problem now unlike in the past — all the excuses given earlier to justify extremely high taxes on oil are not applicable today.

The government must not take people’s disaffection over this issue casually. It must address it before their anger boils over.