Why Oil Costs Might Not Be Falling That Quick

A common message that recently popped up on people’s cell phones reads: “Gasoline / diesel prices have risen an” x “number of days in a row.” Alternatively, satirical memes compare the number of centuries Indian cricket captain Virat Kohli has achieved in recent years and gasoline prices. Unfortunately, the latter has won the race for the 100 rupee milestone in at least some states.

The unrest in the rise in petroleum prices for individuals is akin to the rise in foods like onions, tomatoes, potatoes, legumes, rice, and wheat, the only anomaly being that the earlier goods, i.e. gasoline and diesel, may not be daily Function of some parts of society.

The fact is that both central and state governments have focused on offsetting lost revenue through tax increases on gasoline and diesel. After nearing the 100 rupee mark, individuals, particularly those in the lower classes of society, will ponder whether there is any prospect of a breather in oil prices. The answer probably isn’t anytime soon.

There are several reasons the downward trend could take longer, and even if the government steps in to cut taxes, the relief could be marginal.

Let’s see why that is. First, to illustrate, retail gasoline prices in Delhi were around 89.6 rupees per liter on February 17th, an increase of around 25 percent from the corresponding month last year. In this comparison it becomes very clear that the increase in central excise taxes from 20 rupees per liter in February 2020 to 33 rupees in May 2020, combined with an increase in state VAT by around 30 percent, were the main reasons for the increase.

During this time, crude oil prices have only increased 9 percent at a modest pace. What we’re missing out on, however, is the price comparison between May 2020 and February 2021, where crude oil prices nearly doubled while central excise taxes remained unchanged and state taxes rose 21 percent as they are ad valorem. The important point here is that May 2020 was the appropriate month to raise taxes when crude oil prices almost halved. The government’s measures were relevant at the time, as higher taxes were offset by cheap crude oil prices and stable gasoline prices did no harm to consumers.

The May 2020 offsetting effect may not be available in February 2021, and even if the central government steps in to cut excise taxes, it may not bring the desired relief as the demand-supply dynamics of global crude oil prices will be the deciding factor that outweighs the effects of tax cuts.

Second, the inelasticity of these goods and their exclusion from the GST area were a major factor behind the increase in taxes.

The consumption of petroleum products increased from June 2020 to January 2021 almost on the same period of the previous year and is 7 percent above the value of 2018-19, as soon as the development process in the economy has gained momentum. So consumption was positive despite rising retail prices. Even the treasury was supported by excise tax rallies, with the central government kittens increasing to around Rs.3.6 billion in FY20 (RE) from the projected estimate of Rs.2.67 billion in FY20 (BE) despite the pandemic should.

The average monthly collections from June 2020 to December 2021 were 27,000 rupees, nearly 50 percent higher than the corresponding period last year. The central government has budgeted an average monthly excise tax collection of around Rs 30,000 billion for the 2020-21 period and around Rs 28,000 billion for the coming fiscal year, indicating that reliance on these taxes is likely to continue.

Third, as the unlocking phase progresses, a gradual, albeit coordinated, withdrawal of incentives from both the government and the RBI will also gain momentum. Since the timing of rollback is critical, reversing tax increases is also critical. In the latter case, however, the government will closely monitor the ongoing revitalization of other tax components such as GST, corporate taxes, income taxes, state excise and sales taxes before considering cutting excise taxes.

Gasoline and diesel consumers have suffered in recent months, and those who continue to prefer private vehicles to public transport have to bear the brunt of rising prices. Also unfortunate is the state of taxi drivers, whose spending on essentials and savings has likely been lost.

It is important that the domino effect of rising gasoline prices on other components (especially food) has still not crept in and can put a further strain on consumers’ wallets. Given the challenges and uncertainty prevailing for both consumers and the government, and to many opposing factors, the transition from the landmark 100 rupee mark to the pre-pandemic price range of the 1970s is a distant dream and it does Floating in the 90s is inevitable.

(Sushant Hede is an Associate Economist at CARE Ratings Ltd. Views are personal)

The views expressed above are the author’s own. They do not necessarily reflect DH’s views.