Fuel Price- A pragmatic approach.

Enough is said, read, discussed and argued on all aspects of ever escalating fuel price in India and, despite of all such claims and blames, we all know that the simple reason for the same is the 58% tax that are being levied by the Governments, Central as well as States, at various stages of oil production, distribution and sale. It is also a fact that the sharp spikes in oil prices had made deep holes in the pockets of the ordinary citizens of India, who are fighting a battle with pandemic. There are many justifications for the mounting price of fuel such as (1) Dependency of the nation on oil producing countries for importing the fuel for its need (2) Heavy transportation cost to distribute the fuel across the country (3) Dependency of the Government in tax revenues (4) Permitting the oil companies to have competitive pricing (5) Deregulation on the pricing mechanism of the oil companies (6) Withdrawal of the subsidies on the fuel price (7) Non allocation of Petrol and Diesel under GST Act etc.

The most prominent among the above arguments are the non-tagging of the fuel price under the GST Act and consequent two stage taxation by Central Government and State Governments. Anyone with a very simple mathematical mind can easily calculate the benefit of bringing the Fuel prices under GST and establish that the prices can come down to Rs. 50/- per liter (approximately) from the present Rs. 100/- per liter. Though the Central Government had expressed its interest to bring the fuel prices under the GST regime, many of the State Governments had expressed its strong sense of objection in doing so. The major reason behind their objection is the potential revenue loss that can happen to the States while implementing the low tax rates on fuel. There is clearly a justification for the said objections too, as major source of revenue of the States are mainly from taxes generated from sale of Petrol/ Diesel. If there is a sharp decline in the said revenue, the Governments will face huge financial crunch and will struggle to meet its obligations towards its citizens. Similarly, Central Government will also get cash strapped and cannot afford to fund the mega social welfare schemes and will tussle to do infrastructure push which is much needed for creating a better India. India, being a welfare State, cannot afford to pause or reduce its welfare schemes and also cannot go back from its commitment towards building the heavy infrastructural requirement of developing India.

Another argument cited as a reason for the spiraling up oil price is the removal of the subsidies on it and enabling the competitive price discovery mechanism among oil companies. Subsidies are always a burden on the Government as it eats up the major revenue of the Government, which should have been better utilized for the development of the nation. However, steps taken by the Government to unleash the oil companies to enable them to fix the oil prices in accordance with the price of crude in international markets had evidently backfired. Though the oil companies are taking immediate steps to sleeve up the prices in accordance with the increasing crude price, the same is not being reciprocated when the prices are on its lower side.

Common man- A prey and scapegoat of consumerism, liberalization and inflation illusion.

When the economic walls of the nation had opened up for free trade, knowingly or unknowingly, India had turned into a huge consumer market where anything and everything can be sold easily. As part of the liberalized economy, Indian roads had witnessed a great pomp and show by German, Japan and American made sophisticated vehicles, which had drooled the Indian customers who had thus far seen only Maruti, Premier Padmini and Ambassador cars. During the pre-liberalization era, the banks were hesitant to extend loan to a person who does not have strong financial support. Due to that reason, it was not very easy for a common man to purchase a vehicle. As it was not affordable to own a vehicle, he had depended on public transportation facilities to commute. The Banks, as part of liberalized lending policy of the Reserve Bank of India, had pumped huge money into the market in the form of easy loans and schemes and tempted the common man to purchase the vehicles, which was not otherwise affordable to him. Due to the illusion created by the inflation, the salaries and wages of the common man had also shown an increment in coming years but the expenses also climbed up parallelly. But we failed to understand the effect of inflation on us while purchasing the expensive products which requires regular maintenance.

As per the information published by Central Government in the official gazette, the Cost Inflation Index (CII) for the year 2021-22 is 317 when compared to the CII of 100 during the financial year 2000-2001. To put it simply, the cost of living had inflated by 3.17 times within a span of 20 years. Let me explain this part clearly.

If a person was spending Rs. 10000/- to meet his household expenses during the year 2001, he has to spend Rs 31700/- for affording same quantity of household items during the year 2021-22. On that logic, the petrol price of Rs. 28.44/- during the year 2001 had inflated to Rs. 90.16/- by the year 2021-22 due to the effect of inflation. If we adjust the Cost of Inflation to Consumer price index (Cost Inflation Index = 75% of the average rise in the Consumer Price Index* (urban) for the immediately preceding year), then the price shall be 2.37 times of the price in 2001. In that case, the price of petrol shall be Rs. 67.40/- due to the effect of inflation.

Till 2012, the Government was providing subsidies to oil companies to make it affordable to the public and was actively regulating the market price of the fuel. However, it is a fact that subsidies can create deep wounds in economic vessels of the nation and deteriorate the strength of it in long run. Realizing the said fact, off late, the Governments, as part of strengthening its financial muscles, had stopped the subsidies on fuel price and permitted the oil companies to fix the price in competitive manner. The withdrawal of subsidies and deregulation of the market had resulted in normalizing the price which is adjusted to the inflation. Due to that reason, the price of the fuel was felt as spiked, and the imaginary affordability created by the bank finances started pinching the common man and woke him up to the reality.

From the above it can be seen that, the increment happened in the price of petrol is largely due to the inflation and not due to the unreasonable escalation of the price by the Government. Though this is the real fact, we are not ready to consider the inflation driven increment happened in the price of petrol/diesel while criticizing the Government in an arbitrary manner.

What is the solution for this?

Recently, High Court of Kerala had asked the Government to bring the fuel prices under GST to reduce the burden on the common man. The said suggestion is more emotional than practical. By implementation of GST, there will be a reduction in the fuel price but how the reduction on tax revenue of the Government shall get compensated ? If there is heavy reduction in the tax revenue, how the Governments will meet its social obligations? So, we need a pragmatic and holistic approach towards the issue and address the same in proper manner. If we observe the scene very closely, it can be easily traced that the price of fuel cannot be brought down in any manner otherwise than through subsidies. But as mentioned earlier, subsidies are not only costly but also heavily damage the financial and economic structure of the nation. In view of the above, the Government may consider the following pragmatic approach to make it affordable for common man without affecting its financial texture.

Subsidized rates for transportation vehicles.

Vast majority of the goods in India are moved through road and rail modes and the escalating / varying fuel prices is directly impacting the price of entire goods and commodities in a negative manner. The increase in fuel prices will result in increase in price of goods and commodities making it unaffordable for the common man. This issue can be resolved by subsidizing the fuel price of transport vehicles, both passenger and goods. With the availability of Internet enabled smart phones and GPS enabled vehicles, the routes of the said vehicles can be tracked and they can be incentivized with a direct remittance of subsidies to the linked bank accounts. In order to reduce the black marketing of the fuel, a maximum celling per vehicle can be prefixed depending on the sanctioned routes in which the vehicles are plying. By bringing the fuel price of transportation vehicles under subsidized mode, the impact of fuel price on goods and commodities will reduce and thereby disburden the common man.

Discouraging the ownership of multiple vehicles

As an after effect of liberalized lending policy of the banks, many own multiple vehicles at a time. Though it is the will and wish of a person to own as many vehicles as he wants, it is not wise to provide subsidized fuel price to all those vehicles. So, in order to discourage the owning of multiple vehicles, the fuel price of the primary vehicle can be subsidized. However, it is not practical for the Government or its departments to identify the usage of the private vehicles and refund the subsidized amount to their bank accounts. So, it can be implemented through a reverse taxing strategy. Government is collecting road tax on all new vehicles at the time of its sale. When a person is purchasing his second or third vehicle, an additional tax equivalent to fuel tax, may be charged based on an average usage principle. For the first or primary vehicle, the said tax may be avoided. The said taxation can be easily implemented by linking the PAN or Aadhar of close family members and thereby reduce the chance of any manipulation. The Government is also benefited as it is getting a lump sum amount in the form of fuel taxes at the time of sale of the vehicle. This will discourage the practice of owning multiple vehicles and thereby reduce the carbon footprints to a larger extent.

Encouraging public transportation.

As in the case of goods carriers, the limited subsidies to be extended to passenger vehicles in public transportation segment. The Government should bear the subsidy of the common transportation systems under its ownership and incentivize the private vehicles in that segment by direct remittance of the subsidized amount on a maximum ceiling and average consumption principle. This will reduce the cost of public transportation and thereby reduce the burden on the common man to a considerable extent.

Regulating the price of oil companies.

Though the ‘Price Discovery Mechanism’ is a beautiful word to listen, it is not working as envisaged. The main intention of deregulating the oil companies was to enable a competitive pricing mechanism and thereby benefit the public through discovery of lesser price. However, with very limited players in the market and with single source of raw material, the oil companies are following a synchronized pricing strategy, which is ultimately escalating the price of fuel. The benefit of price reduction of crude oil had never been passed on to the public by the oil companies, instead, they swelled their stock during that time to sell it at a later stage on a higher margin. So, a reasonable regulation of the pricing strategy by Government is the need of the hour. The Government may install a proper mechanism to ensure the fair pricing of the fuel either by passing on the advantage of price reduction to the public or by fixing a ceiling rate on the fuel price.

By adopting the above pragmatic approach, the Government can easily implement a proper fuel policy without impacting its revenue stream and thereby reduce the burden on the common man.

Bijoy P Pulipra