Continued uncertainty

Govt forced to react to new conditions in petroleum markets

The global market for crude oil and petroleum products continues to be so volatile and unpredictable that governments around the world, including India’s, are being forced constantly to examine and reshape their fuel tax policies. The price of crude oil has fallen about 20 per cent from a high in the middle of last month, and West Texas Intermediate is now trading at about $95 a barrel. These are still about a quarter higher than at the beginning of the year. But when prices were earlier high at around $115 a barrel, the Union government had reacted with concern about the inflationary implications in particular. It had imposed an export tax on refined petroleum products and levied a windfall tax on crude oil. These have now been re-examined. The windfall tax has been cut by 27 per cent or so, from Rs 23,250 per tonne to Rs 17,000 per tonne. The export levy on diesel has been reduced from Rs 13 per litre to Rs 11 per litre, and on aviation turbine fuel from Rs 6 per litre to Rs 4 per litre. The export levy on petrol, which was also at Rs 6 per litre, has now been done away with. In addition, it has exempted refineries situated in special economic zones (SEZs) from export duties.

This may not be the only time that the government will have to revisit these taxes. The fact is that the petroleum products market is in for some months of volatility and uncertainty, given the multiple different pressures at play. The removal of Russian crude oil from Western markets; the attempts to substitute away from Russian crude oil and gas and the broader fallout of Western sanctions; the problem of getting the right tankers to the right ports, given the fragmentation of the post-sanctions shipping landscape; and unknown future behaviour and cohesion on the part of the other oil-exporting countries — all mean that supply factors are essentially unknowable. Meanwhile, on the demand side, there is no clarity on the demand destruction caused by the lockdowns in China and recession fears in the West. Altogether, some flexibility will be required — of the kind the government has just shown.

The specifics of the changes, however, are worth examining since they might provide useful lessons for any future adjustments required. For one, the cut of 27 per cent in the windfall tax is not easy to explain since it hardly seems linked to the change in margins following lower prices this month. A more transparent mechanism for calculating a windfall tax might be useful because it would remove concerns about post facto lobbying from the picture. The exemption of refineries in SEZs after first including them makes sense, since such zones were designed to be out of such tax nets — but it would have been better to never include them in the first place, since this also gives the sense that the government responded to pleas from powerful refiners. Then there is the question of the export tax. These may not have been sensible policy choices in any case; export taxes rarely are. But the differentiated levies are unjustifiable. The government should not be picking winners and losers in such a tax policy. Its willingness to adapt and to respond to cues from the markets and the sector is laudable. Further moves in the sector are inevitable, but the government must keep the above basic principles in mind.