Eight years later, Centre takes back control of auto fuel prices

Unlike many other UPA policies the NDA govt overruled or renamed, petroleum pricing had a clear policy direction for the past eight years

A cut of Rs 1 cut in the prices of petrol and diesel, announced by Union Finance Minister Arun Jaitley on Thursday, alongside a Rs 1.5 excise duty reduction, indicates an end to pricing reforms in the petroleum sector, which survived a government change at the Centre.

Unlike many other UPA policies the NDA government overruled or renamed, petroleum pricing had a clear policy direction for the past eight years.

The fact that Jaitley chose to announce the price reduction on behalf of the oil-marketing companies (OMCs) shows that the government wanted to take credit for the full Rs 2.5 decline in price, though in the process it took away any semblance of pricing freedom for the OMCs. Without these, a mere Rs1.50 excise duty cut would not have meant much for consumers, who were paying Rs75.45 for diesel and Rs 84 for petrol in Delhi before Thursday’s announcements.

Ironically, while it took India eight long years and a lot of political bickering to get rid of the administered price mechanism (APM) in petrol in 2010, it took another eight years to go back to controlled pricing. 
 

Former petroleum secretary Saurabh Chandra, however, says it is too early to say that decontrol has ended. “We do not know what would happen if prices continue to rise very high.” 

Jaitley denied any reversal in policy. “We are not going back on deregulation because the oil companies will still continue to factor in price on a regular basis,” he told reporters at a press conference. However, petroleum sector executives fear restrictions on OMCs as the assembly and general elections near. The scope for manipulating prices through duty changes has shrunk for the Centre since 2008, when the Centre partially gave up on an ad valorem duty structure for excise duty on petrol and diesel. 

The ad valorem excise duty had allowed the government to take away a fixed percentage of the price as tax. TThis meant when global prices went up, there was a cascading impact with the government cornering a higher share. To clip this gap, the UPA government decided to move to a combination of ad valorem and specific excise duties in the case of petrol and diesel when global prices started rising. So, in 2005, based on the recommendations of the Ashok Lahiri committee, P Chidambaram, the then finance minister, introduced an excise duty of 8 per cent plus Rs5 for petrol, replacing the 23 per cent excise duty, while for diesel the excise duty was kept at 8 per cent along with an additional specific duty of Rs 1.25 a litre.

Again, while presenting his Budget in 2008, Chidambaram did away with the ad valorem component of excise duty on non-branded petrol and diesel, though it was retained in branded versions. The duty was fixed at Rs14.35 for petrol and Rs 4.60 for diesel. Few months down the line, in June 2008, when Brent crude touched a record level of $140 a barrel, the government was forced to allow a price increase and to insulate some of its impact, it brought the excise duty on petrol down to a flat rate of Rs13.35, and diesel to Rs3.60 while making it nil on LPG and kerosene.
 

This changed when barely a month after the decontrol in diesel pricing, the NDA government in November 2014 started raising the excise duty on the auto fuels. This meant that the government started using the excise duty for controlling what portion of price goes to whom. It also prevented full pass through of price fall to the consumers. 

In May 2017, two and a half years after the NDA government brought in complete diesel deregulation in October 2014, five cities saw petrol and diesel being sold under a daily price change regime. This was followed by daily price revision across the country in June 2017. 

The base price of petrol and diesel will continue to be benchmarked to global rates. On the base price, marketing margins, dealer commission, tax and other levies would be added. 

In June 2010, the UPA government made use of Rs 3.5 a litre differential between the benchmark and controlled prices of petrol to decontrol its price. It took monthly 50 paise hikes and low global prices to decontrol diesel completely in October 2014. But the Centre’s firm footedness on excise duty all along has undone and thrown back the sector to government dictated prices of petrol and diesel.