Govt on right track in raising excise on petrol, diesel

The government's strategy of increasing duty, even while oil marketing companies effect moderate price cuts, reflects a mature and prudent response to the decline in international crude oil prices.

The Union government raised the excise duty on petrol and diesel last Saturday, taking advantage of falling international crude oil prices.

This was the third such duty increase in the current financial year.

But this round, too, did not cause prices at the pump to rise.

This is because the oil marketing companies are still left with a surplus after absorbing the impact of the higher excise duty and passing on the benefit of lower retail prices that they have been announcing periodically over the past year and a half.

All this has been possible because, since June 2014, international crude oil prices have declined about 70 per cent.

Petrol prices have been cut in small doses on 20 occasions and diesel prices too have seen a reduction on 16 occasions.

According to one estimate, consumers of petrol and diesel have gained over Rs 60,000 crore (Rs 600 billion) between April and October 2015, even as the government is likely to garner additional revenue of Rs 10,000 crore (Rs 100 billion) from the three excise hikes in the current financial year.

This will be over and above an extra Rs 22,000 crore (Rs 220 billion) collected on account of the four such increases in 2014-15.

The government's strategy of increasing duty, even while oil marketing companies effect moderate price cuts, reflects a mature and prudent response to the decline in international crude oil prices.

India imports crude oil in large quantities to meet almost 80 per cent of its total domestic demand.

Passing on the entire benefit of the fall in crude oil prices to the oil refining companies or the consumers would count as poor policy, unmindful of the basic principles of taxing scarce non-renewable resources like petroleum products.

The logic of higher duty gets stronger in a situation when crude oil prices are steadily moving in a southward direction and the country’s dependence on imported crude oil continues to rise.

Thus, the government deserves to be complimented on the correctness of its response -- undeterred as it has been by populist demands for ushering in the promised good days through lower prices.

The extra revenue mobilised through the duty increases will hopefully be used for productive purposes like helping the government ramp up its capital expenditure.

The only discordant note comes from hints that the excise duty may be reduced if crude oil prices start rising.

This would only be warranted in order to smooth out runaway inflation in the case of short, sharp increases in international crude oil prices.

The promise of such duty cuts needlessly raises expectations that would later need to be managed.

Another oil sector development that shows the government’s firm commitment to subsidies reform is its decision to roll out the direct benefits transfer scheme for payment of subsidy to consumers of kerosene in 26 districts across eight states from April 1, 2016.

This is expected to curtail the government’s subsidy bill on kerosene, which was estimated at Rs 24,800 crore (Rs 248 billion) in 2014-15.

To get more states to persuade kerosene users to join the scheme, the Centre has agreed to share as much as three-fourths of its subsidy savings on kerosene with the states in the first two years.

The sharing formula would be reduced gradually in the subsequent years.

But this is a commendable start to prevent diversion and misuse of the fuel -- and in the process ensure better targeting of subsidies.

Image: A worker at a petrol pump counts rupee notes. Photograph: Reuters