FPJ Edit: Government cannot be unmindful of the inflationary impact of higher prices of petrol & diesel

Petrol at Rs 100 a litre calls for lower taxes

With petrol prices crossing the important psychological barrier of Rs 100 a litre in Rajasthan on Wednesday, there is bound to be a public hue and cry for reducing the pump prices of petrol and diesel, the latter retailing only a couple of rupees behind petrol. The relentless rise in the price of petrol in recent weeks is ascribed to the recent increase in the global crude oil prices following the revival of the world economy after the coronavirus-induced disruption.

There is no denying that the Centre and the states between them collect enormous sums of money by way of taxes and cesses on petroleum products. The total combined levies are about 60 per cent of the end-price of petrol and 54 per cent of diesel. For instance, for a litre of petrol costing Rs 100 in Rajasthan on Wednesday, the Centre collected Rs 33 by way of customs, excise, additional excise and cesses. The Rajasthan government received on the same litre of petrol Rs 36 in ad valorem taxes plus additional road cess of Rs. 1.50. On diesel, the Centre realised Rs. 32 per liter while Rajasthan received Rs. 35.

While the ad valorem is a value-added tax increasing with the rise in the basic price of petrol and diesel, special cesses levied by the states further push the retail price higher. For example, Maharashtra has a special cess of Rs 10 a litre on petrol and Rs 3 on diesel. Given the inordinately high taxes on petrol and diesel, it will be natural for the demand for a reduction in these to be voiced in the coming days. However, since the non-BJP governments too impose a high burden of taxes, the issue may not gain traction in the public sphere. It may be left to various civil society groups to take up the grievance of the middle and lower-middle class, which will feel the pinch of high petroleum prices.

Meanwhile, the Prime Minister, anticipating the public demand for reducing taxes on petrol and diesel, on Thursday sought to transfer the blame on the previous governments for not doing enough to reduce reliance on the imported crude oil. The country now imports 85 per cent of its energy needs. Had we diversified into solar and wind, hydro and nuclear energy and thus cut the oil imports substantially, there would not have been any need for such steep taxes. He listed the hugely stepped-up progamme for solar and wind power energy generation undertaken in the last six years, expressing the hope that by 2030, the share of renewable energy would be 40 per cent of the total energy consumed in the country.

Modi also said that the percentage of ethanol mixed in petrol was to be raised from the current 8.5 per cent to 20 per cent by 2025, providing an alternate source of income to farmers. Also, the share of natural gas in the energy basket was to be increased from the current 6. 3 per cent to 15 per cent. In order to prevent the cascading effect of levies on petroleum products, the Centre was keen to bring these in the ambit of the GST, the PM said while virtually inaugurating a couple of oil and gas projects in Tamil Nadu on Thursday morning.

Meanwhile, Petroleum Minister Dharmendra Pradhan’s call to the petroleum-producing countries to step up production by lifting the cuts imposed during the coronavirus pandemic is unlikely to be heeded. The pent-up demand in the global economy following the long slowdown due to the pandemic has to work itself out before a stability in demand and supply of crude oil can be restored. Besides, the oil exporters too need to make up for the shortages in revenues due to the disruption caused by the pandemic.

But the government cannot be unmindful of the inflationary impact of higher prices of petrol and diesel, since these have a cascading effect on the general priceline. This would cause a double-whammy for the middle-income groups, which would be called upon to pay through their nose both for running their two- and four-wheelers and/or relying on public transport. Prices of everyday items such as vegetables and pulses, sugar, etc., are bound to increase if the retail prices of diesel stay high.

Even though consumer inflation is under control, should high-energy prices distort the general priceline, public hue and cry for reduction in POL levies will be hard to ignore. Both the Centre and the states together should reduce the levies on petrol and diesel, in order to bring the retail prices a tad lower than the key mental barrier of Rs 100 a litre. No, consumer psychology cannot be ignored either.