Memo to Alphons Kannanthanam: Transparent petrol, diesel pricing will help, berating aam aadmi won’t

New Delhi: Alphons Kannanthanam has added fuel to the petro price fire, and what’s worse, by putting on his socialist hat. The minister has been quoted wondering why a consumer who can afford a car or a two-wheeler cannot afford fuel, however costly. Surely car owners are not starving, Alphons said over the weekend, as rage over increasing prices of petrol and diesel seemed to boil over on social media. This, when retail prices of petrol and diesel have either surpassed or nearly touched the levels prevailing in mid-2014, when the Modi government had just been sworn into office, after continuously pointing out the outgoing UPA government’s failure to control these very prices. After Alphons’ comments, the Opposition parties have begun organising signature campaigns and at least in one state there has been a call for a bandh today to protest rising price of petrol and diesel.

In his haste to justify the recent price increase, Alphons, a former bureaucrat, perhaps forgot that the Indian middle class – the very people he seemed to be mocking - is the bedrock of this country’s minuscule tax base and that few politicians have dared to challenge middle class wisdom for fear of massive backlash. Why should the aam aadmi pay almost Rs 40 in taxes (centre, state levies) on a litre of petrol which is sold from refineries to dealers at about Rs 30? The minister also perhaps did not realise that continued high fuel prices would stoke inflation, which would ultimately hurt the poor – people who indeed cannot afford to pay.

An analysis by CARE Ratings says in terms of inflation, 10 percent increase in price of crude oil (which would anyway mean a higher increase after taxes for consumers) translates to WPI (wholesale price index) going up to 0.5 percent depending on the quantum of pass-through by the government and oil companies. In case of CPI (consumer price index) the impact could be up to 0.15-0.2 percent.

Alphons may have thought that insensitive comments like these would shut up detractors but it is likely that his outburst may already have had the opposite effect. The prime minister’s office has sensed the gathering storm and sought details of petro pricing.

This piece in Hindu BusinessLine  says all eyes are on Narendra Modi’s office to find a solution to protect consumers from the flare-up of petrol and diesel prices. “Explanations and justificiations in defence of the hike, by Minister for Petroleum & Natural Gas Dharmendra Pradhan, have failed to defuse the situation. This has prompted the PMO to seek information on it.” Whether the PM does signal a step back in rising prices remains to be seen, though the upcoming festival season and fears of a spike in inflation on continued high prices of these fuels could force his hand.

 Memo to Alphons Kannanthanam: Transparent petrol, diesel pricing will help, berating aam aadmi won’t


There is no gainsaying the fact that taxes on petrol and diesel contribute significantly to the government’s coffers and are in turn used for welfare schemes, and that every government is averse to cutting taxes on these two fuels. But by ridiculing the aam aadmi and aam aurat, Alphons has not endeared himself to anyone.

Besides, the Centre should not be shouldering all the blame over high prices of these two fuels as state levies also account for a large share of the burden. If someone has to step back, it should be both, Centre and states. The ideal situation – bringing petrol and diesel under the GST regime – has already faced stiff resistance from states.

Anyway, the petro price math is not tough to understand. Excise duty collections from high speed diesel (HSD) and petrol or motor spirit (MS) sales constitute 84-87 percent of the overall excise tax collections of the government, according to a report by Integrated Research and Action for Development titled ‘Converging the divergence between diesel and petrol prices: A case for rationalisation of the Central Excise Duty’. This means 20 percent or about a fifth of the government’s total tax collection comes from the taxes you and me pay to buy one litre of petrol or diesel. Why would the government then consider lowering these taxes and thereby significantly impacting its own tax receipts?

Here’s another number. As much as Rs 4.4 lakh crore was generated last fiscal by the government through various taxes and levies on petrol and diesel. The Centre accounted for 62 percent or two-thirds of the total revenue through such levies. Also, as explained earlier, any change in the excise duty on these fuels would anyway impact the VAT states levy.

According to CARE Ratings, as of July 2017, central taxes on these products range from Rs 21.5-Rs 22.7 per litre for petrol and 17.3-19.7 per litre for diesel. Additionally there are state taxes which vary for petrol from 20 percent in Mizoram to 48 percent in Maharashtra (Mumbai). In case of diesel they vary between 12 percent in Mizoram and 38 percent in Madhya Pradesh. While the central taxes are on the basis of per litre (specific) , state taxes are ad-valorem and would tend to increase the final retail price when the base crude oil price changes. Any change in excise duty rates will affect the price on which state VAT/ST is levied and impact state VAT collections (VAT/ST is a state subject).

Another important thing to note here is that the practice of daily price revision - which started from June this year and which is being blamed for the current price flare up - brings little transparency to the mechanism used to determine prices of petrol and diesel.

This piece in Hindu BusinessLine points out flawed movement of the trade price parity (weighted average of import parity price (IPP) and export parity price (EPP) with weights of 80 and 20 respectively of petrol)

So wonder why, when the pricing is being done daily, the TPP, the value of the rupee and the refinery transfer price remain constant for extended periods? “Rather than showing the daily changes in the TPP and the rupee values, the oil companies are adjusting price differences in the daily prices charged to dealers. This gives the impression that the amount is going unfairly into the oil companies’ coffers,” this piece says.

Put simply, this could mean there is enough leeway available with the government for some nudging to oil companies on pricing, even when the practice of daily price adjustments is continued. Perhaps the time has come to not only open up the pricing mechanism to scrutiny but also be sensitive to inflationary pressures being created by continuous rise in petrol, diesel prices.

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Updated Date: Sep 18, 2017 13:09:00 IST