COMMENTARY – Will India reduce excise duty on petrol and diesel to ease rising retail prices?

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The Indian government is in a bind.

Rising global crude prices at a time when the ruling Bhartiya Janata Party (BJP) has to face key state elections in 2018 is putting pressure on it to find ways to ease domestic retail prices that have been rising consistently in recent weeks.

Given that the consumer will be expected to vote in coming months, curtailing fuel prices becomes key.

India has had a good run since the BJP government came to power in 2014, as crudeprices fell from their all-time highs of $150/barrel to below $50.

However, a pact between the OPEC and non-OPEC producers since last year to curtail production, has seen a gradual rise in global oil prices that have climbed to $70/barrel, putting pressure on domestic pump prices.

Media reports have suggested that the oil ministry is pushing the government to slash excise duty on petrol and diesel in next years budget, which is due to be read out in parliament by Finance Minister Arun Jaitley on February 1.

Among South Asian nations, India has the highest retail prices of petrol and diesel thanks to various taxes that account for about 40-50 percent of the pump prices.

However, it might not be an easy play for the government to slash the excise duty given that it is struggling with thedual problem of a widening fiscal deficit and an falling tax revenues due to the introduction of the Goods and Services Tax (GST) from last year.

In 2016/17, the petroleum sector contributed around 5.2 trillion rupees ($81 billion), about a third of total revenue receipts, for federal and state finances, a Reuters report said.

The government raised excise duty nine times between November 2014 and January 2016 even as global crude prices fell in its attempt t raise its revenues. It cut some of it last October.

There has also been a demand to include petrol, diesel, natural gas and jet fuel in the GST to allow oil marketing companies claim tax credits against the tax paid on refining equipment.

The government has, however, is yet to agree to bring fuel into the ambit of GST since it fears loss of revenue.

Given that the global crude market is likely to be volatile in 2018 as the oil production agreement holds, it might well be time for the Indian government to take the hard decision.

Politics will eventually decide the fate of oil prices in India.

Shekhar Ghosh is consulting editor, Indoasiancommodities.com. He has edited and written for publications like Business India, Business Standard, Business Today, Outlook and many other international publications. He also advises companies on thought leadership imperatives.

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