Dealing with Petrol Price Rise

What is the issue?

Prices of petroleum products are in a rising trend in recent months, calling for action by the government.
But the Centre has some compelling reasons to not interfere with the prices.

Why is interference not feasible?

Over 80% of consumption needs are dependent on imports.
This undermines our capacity to determine its prices.
Petrol and diesel cost increase by Rs 0.50/litre with one-dollar increase in the international price of crude oil.
Likewise, it increases by Rs 0.65/litre with a fall in the exchange rate of the rupee against the US dollar.
Thus, the price of petroleum products is largely externally determined, making any interference inadvisable.

Why is Centre's role limited?

There is a concern that petroleum products are highly taxed in India.
The demand is thus to bring down the excise duty by the Centre to control the spiralling prices.
But it is estimated that a Rs 1 reduction in the excise duty would reduce revenue collection by Rs 14,000 crore.
But India clearly needs this revenue for catalysing economic growth and providing social security.
As, a large component of central government duties on petroleum products is given to state governments.
The rest is spent on centrally-sponsored welfare schemes in the states.
Thus, the total amount transferred by the Centre to the states comes to around 75% of the collections.

What can states do in this regard?

Higher prices are likely to reduce consumption.
So, if the consumption falls, the tax collected by the Centre also goes down.
This is because taxes imposed by the Centre are specific i.e. fixed in terms of Rs per unit.
On the other hand, the states tax the oil on ad valorem basis.
This means that the tax is based on the assessed value of the commodity.
So, with increasing petroleum prices, states' tax collection correspondingly goes up.
Thus, the states could make a 10-15% duty cut and still get the same amount of tax revenue as budgeted.
Therefore, the call for reduction in taxes on petroleum products applies more to the states than to the Centre.

What is the way forward?

The long-term solution to this problem is to change the share of petroleum products in energy consumption mix.
India needs to generate more energy from coal and lignite which is abundant in the country.
It should also focus on electricity generation from hydro, nuclear and other renewable sources.

Source: Indian Express