The political economy of petrol-diesel price hike
Petrol and diesel prices have gone up by Rs 9.17 and 11.14 per litre respectively between June 6 and July 3 in Delhi. An HT analysis published on June 24 showed that the gap between retail prices in Delhi and international crude price reached an all-time high in March 2020; this still continues to be significantly higher than pre-pandemic levels. This is because of an increase in taxes on petrol and diesel. Between April 1 and July 1, the share of central and state taxes in petrol and diesel prices in Delhi increased from 45% to 63% for diesel and 54% to 64% for petrol. Central taxes per litre are almost twice state taxes. And while fuel prices vary across states, the trend across India is pretty much the same.
See Chart 1: Build up of petrol-diesel prices in Delhi on 1 April and July 1
As is to be expected, the tax-driven hike in petrol-diesel prices has become a political issue. The Congress and other opposition parties are demanding a reduction in taxes. The central government has justified the move by saying that the tax proceeds are being used for spending on “healthcare, generating employment and giving people financial security” and claimed that the common man has not been hit by the price hike as their consumption has decreased due to the lockdown . The truth, as is often the case, lies somewhere in the middle.
Unlike developed countries, a very small share of Indians own cars. According to the 2011 census, only 4.5% of households owned a car, jeep, or van. The 2015-16 National Family and Health Survey (NFHS) puts the share of households owning a car or truck at 6%. To be sure, the share of households owning a motorized two-wheeler is significantly higher, 21% according to the 2011 census and 38% as per the 2015-16 NFHS. The 2011-12 Consumption Expenditure Survey (latest available data) shows that an overwhelming majority of Indian households either do not spend or spend very little on petrol and diesel. Petrol and diesel had a share of 2.4% in average Monthly Per Capita Expenditure (MPCE) in 2011-12. This increased from 0.1% for the bottom 10% of households to 4.2% for the top 10%. So, there is some merit to the claim that an increase in petrol-diesel prices does not affect household budgets directly.
See Chart 2: Share of petrol-diesel in total MPCE by decile class
Does this mean that rise in petrol-diesel prices are a non-issue for the common man? Not necessarily. Petrol and diesel are crucial inputs for some of the poorest entrepreneurs in the Indian economy.
Farmers use diesel as fuel in tractors and irrigation pumps. According to farmers activist Ramandeep Singh Mann, the diesel price hike might wipe out the benefit of the entire increase in Minimum Support Price (MSP) for paddy. It takes 25-30 litres of diesel to prepare an acre for cropping and another 75 litres of diesel over the entire season for irrigation, Mann said. Now, a hike of Rs 11 per litre in diesel prices means an additional expenditure of Rs 1,100, which is roughly equal to the MSP hike, assuming a yield of 22-23 quintal per acre, he added. To be sure, not all farmers use diesel pumps for irrigation purposes, as electricity is heavily subsidised for farmers.
Another area where a fuel price hike can adversely affect poor people is in the transport sector. According to the 2018-19 Periodic Labour Force Survey (PLFS), 2.9% of India’s workforce is directly employed in the motorised road transport sector. This excludes railways and non-motorised transport. Of the 11 million who are employed in this sector, 40% are self-employed. This is higher than the average share of self-employed people (36%) in India’s non-agricultural workforce. Some states have a significantly higher share of workers in this sector than others.
See Chart 3: State-wise share of motorised road transport in total employment
The passenger transport sector is bound to have suffered a huge fall in revenue due to the lockdown and continued fears about using public transport due to the Covid-19 virus. A rise in fuel prices must have made matters worse, as passenger volumes continue to stay low. The poor financial health is certain to affect workers in the sector.
What about the cascading effect of higher fuel prices on other commodities? Transport operators say that diesel prices comprise around 65% of their operational cost. Mahendra Arya, President, All India Transporters Welfare Association, said that diesel prices have increased by around 22% since the lockdown was imposed on March 25. Accordingly, their transport costs have increased by around 14%, he added. The operators also complained of their inability to transfer the increased transport costs to their customers at present. With transportation demand down by almost half in the last few months due to Covid-19 , operators do not have much leverage over customers and are not able to fully pass on the cost , said Naveen Gupta, secretary general at the All India Motor Transport Congress.
The increase in the basic transport cost will eventually affect many sectors, said Himanshu, associate professor of economics at Jawaharlal Nehru University. This includes the food sector which has seen inflation in the last few months , he added. Even if the market is bad, transporters will have to increase prices to cover their costs, Himanshu said. Not everyone agrees. Madan Sabnavis, chief economist at CARE Ratings, said that with the quantum of goods transported being lower than before, operators may not increase the cost and bear it themselves, in the hope that this is temporary.
With economic activity collapsing during the pandemic, petrol and diesel prices have emerged an important cushion for revenue mobilisation for both central and state governments. Given that even non-Bharatiya Janata Party state governments have resorted to its use, any blanket calls for a rollback in central taxes will not pass the hypocrisy test. Data available with the petroleum ministry shows that taxes imposed on fuel by states governments have gone up significantly during the pandemic. For example, in Delhi, state tax on diesel almost doubled between April 1 and July 1. State taxes on petroleum do not follow a uniform structure across India. All states except Kerala, Gujarat, and Telangana have increased taxes on petrol and diesel in the post-pandemic period. Madhya Pradesh, for example, has increased the ad valorem VAT on petrol from 28% to 33% and the fixed VAT from Rs 1.5/litre to Rs 3.5/litre in May this year. Rajasthan increased the ad valorem VAT from 26% last year to 36% in May this year and to 38% in June. Because the Petroleum Planning and Analysis Cell website does not give a historical archive of state taxes, this analysis has compared June tax rates with online archives for February 2019 and May 2020.
Petrol and diesel consumption fell sharply because of the lockdown. April consumption in physical terms was less than half the consumption last year. Things improved in May, and the annual contraction was to the tune of 29% for diesel and 35% for petrol. With the easing of lockdown restrictions, June consumption should be closer to normal . With sales volumes increasing, the government can realise the same amount of revenue for lower per-unit taxes. A transparent revenue forecasting exercise, given the fact that institutions such as the International Monetary Fund and World Bank have already made their economic growth projections for the current fiscal, can be used to draft a plan about how much extra revenue should be drawn from petroleum products. State government could also argue that greater share of petroleum revenues be transferred to the divisible pool of taxes, rather than the centre keeping it all. The entire increase in central taxes on petrol and diesel after the pandemic has been under the heads of special additional excise duty and additional excise duty (road and infrastructure cess), neither of which forms a part of the divisible pool of central taxes.
As far as vulnerable consumers such as farmers and the poor making a living in the passenger transport sector are concerned, concessions can be made through special channels such as Kisan Credit Cards or some sort of a limited subsidy against vehicle registration certificates. These, however, require nuance.