:: Technical --- ID :: 18301
In case you thought petrol @Rs 100 won’t become the new normal just yet, think again
In case you thought petrol @Rs 100 won’t become the new normal just yet, think again

In case you thought petrol @Rs 100 won’t become the new normal just yet, think again

The Indian consumer's hope that petrol @Rs 100 might not become the new normal just yet, may have been dashed.

Yesterday, OPEC+ — the grouping of major oil producers — made public its plan to continue with its production cuts till April. It effectively means that if you are headed to the petrol pump, brace yourself to keep paying more for longer than you thought you would.

In all likelihood, the move by OPEC+ would push retail fuel prices to new highs in yet more towns and cities in India, putting paid to the hope that Indian consumers may get some relief at last.

The Indian government was hoping that oil exporting countries would end the ongoing production cuts by March end, which would have brought local prices down in importing countries like India.

Before the important meeting, India's Oil Ministry had sent out requests to OPEC+ to raise production and "bring back some of the price stability", various reports said.

However, Saudi Arabia and Russia — the prime players in the grouping — reportedly went with just the opposite, pushing for production cuts to be extended for some more time.

Any hopes of relief now hinge on the government reducing some of its taxes on fuel. But given the signals being sent out by the Centre, such hopes seem far-fetched at best.

OPEC+'s latest move makes for a tough choice for the government. Had the production cut been ended, fuel prices in India would have eased without the taxes needing to be cut. Most of the local retail prices here is a function of taxes levied by Central and state governments, which they are unwilling to cut.

Fuel tax: This way or the highway
According to official data, these taxes have accounted for a mind-boggling Rs 14 lakh crore in just the last three years.

States have much less legroom when it comes to cutting taxes to give the consumer some relief. The central government, over the past few years, has systematically raised the cess component — which it doesn't require to share with the states — to such an extent that it has become practically impossible for states to get by without raising or keeping constant their own local taxes and VAT.

Till some years ago, states used to get a significantly bigger share of the total fuel proceeds, in keeping with the Finance Commission's estimates that they are entitled to more than 40% of these proceeds as their excise share. These days, however, the new cess mechanism leaves them with much less than that — according to some estimates, states now have to make do with just 10% or thereabouts of the total pool at times.

Here's an example of how the states' share has starkly dwindled over the years to reach unviable levels now: The budgeted fuel tax for next year is Rs 3.2 lakh crore, out of which the states will be getting a piddling Rs 7,000 crore.

This often leaves states between the proverbial rock and the hard place. To bring back some semblance of fiscal normalcy, they are usually left with no option but to levy excise and VAT at the local level.

New normal almost here
Currently, crude prices are hovering around $65 per barrel — their highest levels in almost a year. It has pushed petrol and diesel prices to historic highs in import-dependent India.

The government's high cess policy has found backers in some quarters in view of the pandemic hurt to the country's fiscal health. In general, however, exorbitant retail prices have fuelled anger among harried consumers and there have been widespread calls for a tax cut.

Some states like Assam, Bengal, Meghalaya and Rajasthan have recently offered people some relief by way of a VAT cut. But going by the signals being sent out from the highest levels, the Centre appears to have no similar plan at present.

In a number Indian cities and towns, Rs 100 for a litre of petrol is already an off-and-on new normal. And indications are that it could soon become one and the same for other cities too.

The Economic Times 05-03-2021