The price of petrol in Mumbai touched an all time high of Rs 91.24 a litre on October 4.
With the recent decline in the price of crude oil in the international markets over the last one month, everyone is asking the question: why isn’t the decline reflecting in the retail prices of petrol and diesel in India?
In September this year, the NDA government was having a tough time dealing with rising crude oil prices in the international markets. Brent crude rose more than 20% in the first half of 2018, and hit a four-year high of $86.07 per barrel in early October.
The price of petrol in Mumbai touched an all time high of Rs 91.24 a litre on October 4.The fear of possible US sanctions on purchase of crude oil from Iran added to the economic headwinds.
Sensing an opportunity to corner the government ahead of polls in five state assemblies, the opposition parties did everything possible to mobilize public sentiment against rising fuel prices.
Fearing a public backlash in state assemble elections, the union government cut central excise duty levied on petrol and diesel by Rs 1.50 and asked the oil marketing companies to cut their prices by Rs 1 a litre, resulting in an effective fuel price cut of Rs 2.50 perliter. .
The decision was calculated to result in revenue loss of Rs 10,500 crore for government for the remaining fiscal. It was a hard call as the government is struggling to keep its fiscal deficit target at 3.3% of the GDP due to lower than expected growth in indirect taxes and an expected shortfall in earnings through disinvestments.
Winds of Change
However, the government’s position has changed within a span of one and a half months.Between early October and November 20, 2018, Brent crude price has declined by 28 per cent. As an icing on cake, Indian rupee too has appreciated against the US dollar by 4 per cent from an all time low of 74.38 on September 9, 2018 to 71.36 on November 20, 2018.
So, if there is scope to cut fuel prices during the ongoing state elections- which is a semi-final of sorts ahead of the 2019 general elections- will the government take a lead in nudging state-run oil marketing companies (OMC) to provide relief to the consumers?
OMCs were earning a record margin of Rs 6 and Rs 4.8 on the sale every litre of petrol and diesel as on November 20. This is significantly higher than the average margin earned by them in last fiscal year at around Rs 2.6-2.8 a litre.
Testing The Waters
Common political sense says that in an election year, a government should reduce fuel prices to win votes. However, the policy of the NDA government, since 2014 has been quite the opposite. Despite facing criticism from all quarters, it has resisted the urge to give a dole by keeping fuel prices low.
Between 2014 and 2017 when international crude oil prices touched record low, the government instead of reducing retail prices, increased excise duty on petrol and diesel Rs 11.77 per litre and Rs 13.47 respectively.
This helped government rake in close to Rs 7.5 lakh crore in the form of excise duty from petroleum products in just 4 years. The budget estimates for 2018-19 pegged revenue from petroleum products at Rs 257,850 crore, a whopping 191% increase compared to what the then UPA government collected in 2013-14.
This windfall has allowed the government to pump in money in the beleaguered banking sector reeling under the burden of non-performing assets. According to the Reserve Bank, the gross non-performing advances (GNPA) ratio stood at 11.6% in March 2018 for scheduled commercial banks. For the public sector banks, the ratio stood at 21%.
To keep the Indian economy afloat, amidst news of slowing global economy, the government will have to focus on boosting internal demand by increasing liquidity in the economy and increasing public expenditure.
The recent spat between the RBI and the government was an indicator of the challenge that the present government is facing in the form of liquidity due to declining private sector investments. A recent report by Crisil Infraindex said that share of private investments in the infrastructure sector has fallen to around 25% in FY18 from a high of 37% in FY08.
In this scenario, the government will have to take a tactical call over choosing a tried and tested path of reducing fuel prices to win over the electorate in an election year or choose the path of pumping in money in India’s infrastructure and banking sector with the hope of sustaining a close to 8% GDP growth rate.
Going by the experience of last 4 years, the latter scenario appears to be more plausible. But the price of crude oil and government’s policies in an election year can never be predicted perfectly.