Nearly two-and-a-half years ago, when global crude oil prices were around $75 a barrel, petrol was selling at Indian pumps for Rs 75 a litre. Today, when crude oil prices have fallen to $52 a barrel, petrol prices have hit an all-time high of Rs 86 or thereabouts a litre. The logic of such an otherwise inexcusable anomaly is of course the government’s need to raise revenues in difficult times by taxing a commodity that no individual or enterprise can really do without.
Some 67% of the retail price of petrol and 61% of that of diesel go towards taxes as of today. For the last five years, the Centre has used the fall in crude prices to raise taxes and effectively keep the retail prices of petrol and diesel within a narrow range. If the fall in crude prices had been passed on to consumers, the pump prices would have fallen by 50 paise for every $1 drop in crude rates. Which means sometime last year, when crude was averaging $25 a barrel, petrol should have sold for Rs 50 a litre.
The reverse obviously kept happening as the Indian state cranked up its taxes on auto fuels every time crude prices fell. Now that the global economy has started bouncing back and demand for crude has started pushing up prices, the chances of lower oil prices in India are next to nil. The best we can hope for is a stop in the weekly increase in taxes expressed as a percentage of retail prices.
Higher fuel prices coupled with high interest rates and costs imposed by poor infrastructure and red tape have turned India into one of the highest cost economies in the Asia-Pacific region. This policy of increasing the burden of taxes on a commodity whose demand will not fall even if prices were to rise has contributed much to that dubious distinction.
What needs to be done, at least to ensure the situation does not worsen, is for the state to check its propensity to raise taxes any further on our transport fuels by freezing them at current levels. The government needs to understand that India’s growth story, which has started showing signs of a revival after months of shrinking, could well be stymied if it refuses to give up its bad habit of overtaxing this fuel and feeding the fire of inflation.