Amidst all the mayhem on the stock markets and the disruption of the economy triggered by Covid-19, consumers in India were quietly hoping they might enjoy some relief from their ever-increasing fuel bills. Chaos sometimes has its good side. But the government had other plans. On Saturday, it hiked excise on petrol and diesel by a steep Rs 3 each to mop up Rs 39,000 crore, repeating its cynical 2014-15 act, and dashing peoples hopes.
As factories shut down round the world and demand shrinks in the wake of the coronavirus epidemic, Brent crude prices on Friday at $32.7 a barrel suffered the biggest fall since 1991, when US forces launched their airstrike on Iraqi troops after the latter invaded Kuwait. The Monday mayhem a week ago saw global oil benchmarks free-falling 22 per cent as the OPEC cartel crumbled and the Saudis jacked up production despite falling demand.
The Organisation of Petroleum Exporting Countries (OPEC) led by Saudi Arabia and Russia had managed the prices of crude oil even amidst slow demand since 2016 by orchestrating supply cuts of 2.1 million barrels per day. The Saudis wanted to jack up the cuts to 3.6 million barrels a day through 2020, but Russia’s Vladimir Putin pulled out fearing such low production would cede ground to US producers. After OPEC imploded at its meeting last Friday, Saudi Arabia decided to stake it out for a larger market share by slashing prices and raising production simultaneously. Regular buyers were offered discounts of $4-7 a barrel while production has been hiked up to 10 million barrels a day.
This spooked the oil market into a freefall. China is slowly pulling out of the coronavirus morass, but is there likely to be a spurt in demand in the near future? Last month, the International Energy Authority (IEA) had warned that China’s industrial paralysis had sunk oil demand in the first quarter by 4,35,000 barrels per day (BPD) given that the country has the second-highest consumption in the world at around 13.5 million BPD. But that was before the US had entered the crisis zone. President Trump, by stopping flights and discouraging trade between the world’s two largest economic zones, has just ensured that the slowdown is going to be a long one with catastrophic effect on long-term oil demand.
We must remember with a consumption of nearly 20 million barrels per day (BPD), the US burns 20 per cent of the world’s oil, the largest by far. The India story For India, the oil story has a welcome ring. Though the global slowdown will be a drag on India, the immediate benefits are hard to miss. For a country that imports 85 per cent of its oil needs, the oil bill dropping close to half – from $59 a barrel in mid-February to $32 a barrel – is a major windfall. Anand Mahindra tweeted: “So this is what a global meltdown feels like. For India, it’s a crisis we mustn’t waste. The Govt can use low oil prices both to spur consumption but also retain some of the windfall gains to tackle the deficit.
” For every $10 a barrel decline in crude oil prices, India saves $15 billion off its petroleum import bill. India spent a whopping $120 billion in FY2019, up from $88 billion a year ago. But the past has shown that the savings from a reduction in international oil prices are scarcely passed onto the poor consumer. In the period from December 2014 to January 2016, when oil prices had substantially dropped, the Central government had systematically raised excise duty as many as nine times, mopping up over Rs 10 lakh crore in taxes. It was only on one occasion that excise duty was reduced — in October 2018. Government levies are a huge proportion of the retail price of diesel and petrol.
The Union government levies Rs 19.98 excise duty on a litre of petrol and Rs 15.83 per litre on diesel. The states levy VAT ranging from 6-39 per cent. For the consumer, things are moving in the same direction this time too. Though oil prices have fallen 30 per cent in the last fortnight and 40 per cent since they were $65 a barren in end-December last year, retail prices have declined by only 7 per cent. In fact, the Karnataka government last week hiked VAT on petrol from 32 per cent to 35 per cent and on diesel from 21 per cent to 24 per cent. In respect of fuel prices – diesel, petrol and LPG cylinders – the consumer has always seen the rough end of the stick.
He now deserves to be the recipient of not less than 50 per cent of the benefits. A reduction in fuel bills will contribute to easing the pain of the slowdown and help calm inflationary pressures. Oil and its products have a weightage of 10.4 per cent in the basket of commodities that make up the wholesale price index. Money saved on fuel will also spur general consumer spending and hence help crank up demand and production across the board. There is nothing more confidence-generating than money in the pocket.