We need clarity on petroleum pricing

Petrol-diesel prices are breaking new records every day. But the politics over it is nothing new. The central government is blaming international factors and citing fiscal concerns. The opposition is organising protests like yesterday’s Bharat Bandh to score political points. Things were exactly the same when the previous government was in power. Politically this makes perfect sense. But such flip-flops damage the credibility of India’s policy making institutions. It is high time that India arrived on a clearly spelt-out policy rule for petroleum pricing. Any such effort will require clarity on the following issues. And this is not an exhaustive list.

Complete deregulation of petroleum prices might make economic sense but it is impossible to justify this politically in a country like India. Rising petroleum prices have a twin impact on inflation: via increased travel costs and a rise in transportation costs. The former does not hurt only well-off people. Two-wheelers have mass ownership in India. Millions of people make their living by operating small commercial vehicles. Rising fuel prices without a hike in passenger/freight fares squeezes their earnings. This government’s decision to completely deregulate diesel has increased the inflationary potential of fuel price hike through transport cost route even more.

This is not to say that domestic prices can be kept immune from international oil price movements or the impact of exchange rate fluctuations. India simply does not have the fiscal legroom to make such a promise. Any such policy will also backfire in a big way because of the fiscal situation going berserk.

So what is to be done?

The Rajasthan government has decided to reduce Value Added Tax (VAT) on petroleum by four percentage points. Should other state governments follow its cue? Petroleum ministry data shows that VAT on petroleum (as on September 1, 2018) in Rajasthan was much higher than the all-India average. Petrol and diesel had a VAT of 30.8% and 24.1% in the state. These rates were 26.9% and 16.8% in Uttar Pradesh. It is unfair to expect the UP government to announce an equal reduction in taxes. For a state with lower levels of economic development, petroleum might be among the most reliable sources of revenue.

Bringing petroleum products under the purview of GST will significantly reduce prices but also lead to substantial loss in revenue for both central and state governments. Unless these concerns are resolved, there cannot be any agreement on a one-nation one-tax policy for petrol and diesel. Is India’s political class even willing to make such an effort?

First Published: Sep 10, 2018 18:59 IST