Union Petroleum Minister remarked that the government's idea was to take a cautious and conscious approach of a balance in fuel prices, save it and use it for welfare.
With general consumption at a low phase, here is an assessment if this approach would be beneficial or not.
What opportunity did low oil prices offer India?
Global oil prices are still about 45% lower than 2019 closing levels.
[This was despite coordinated supply cuts by major global oil producers.]
With this, India had an opportunity to pass on the benefit to consumers.
This could have also given a fillip to the stalled consumption scenario.
What happened though?
The ‘deregulated’ oil marketing companies chose not to reduce the retail prices even when crude prices dropped in April 2020.
This could be attributed to their caution amid a sharp slump in demand, in the wake of the nationwide lockdown.
The government decided, earlier in May 2020, to raise Excise Duty on petrol and diesel for a second time in less than 2 months.
This gave way to several concerns.
After this, the Centre’s tax revenue on a litre of petrol sold by IOC in Delhi as on May 16, 2020 was 1.8 times the fuel’s freight inclusive base price of Rs. 18.28.
This represented 46% of the final retail price of Rs. 71.26.
Is the government's move justified?
With economic activity brought to a near standstill by the lockdown the Centre’s overall revenue prospects have come under severe strain.
From that perspective, the government’s move to maximise its takings from transport fuels is understandable.
However, the government has consistently tinkered with the duty structure through recent years of low oil prices too.
This undermines the benefits from pricing deregulation that ought to have accrued to oil companies and consumers.
What is the need for caution?
The government aims at maximising revenue from fuel products to fund welfare measures.
But notably, this can bear fruit only if demand for petrol and diesel remains unaffected by the continuing high costs.
It is hard to see transport fuel demand rebounding to pre-lockdown levels for at least one or two quarters given the below:
COVID-19-led restrictions on inter-State transportation is still in place
Contracting automobile sales are unlikely to recover any time soon
Job losses and pay cuts are sure to shrink household budgets
Added to this is the Centre’s ambitious disinvestment target of Rs. 2.1-lakh crore for this fiscal, which notably includes a stake sale in BPCL.
So, the petroleum products’ pricing approach gets even more complicated.
Potential investors are unlikely to be impressed by the lack of autonomy in the sector.
So, it is in the government’s interest not to risk the health of the gainful petroleum sector.
