Government profiteering from crude oil prices

The massive 10 percent increase in the prices of petrol (Rs.4) and diesel (Rs.2) decreed by the Congress-led United Progressive Alliance (UPA) government on June 6 is certain to send an inflationary surge through the Indian economy. The stated rationale for raising automotive fuel prices is the high price of crude oil in the international marketplace, which has risen from $55 per barrel in March to over $70 currently. With India’s oil refining companies having to pay 25-30 percent more for imported crude (80 percent of India’s annual consumption of 104 million tonnes of crude oil is imported), they were reportedly incurring a huge loss estimated at Rs.200 crore per day prior to the recently decreed increase in petrol and diesel prices. Ex facie this argument is compelling. But it obfuscates the truth that the real reason behind the country’s crude oil importing and refining industry suffering huge losses is the crushing ad valoremcustoms and excise duties imposed on imported crude and refined petroleum products by the Central government. And ex factory, state governments get into the taxing act and impose further ad valorem sales tax. Consequently every time crude oil prices rise (mainly for geo-political reasons) in the international marketplace, the Union and state governments reap huge unbudgeted revenue windfalls. According to The Hindu (June 7) the tax receipts of the Central and state governments from the petroleum industry aggregated a massive Rs.120,946 crore in 2004-05. Now following the steady increase of crude prices during the past three months, the exchequers of the Central and state governments are banking a further, entirely fortuitous, windfall. Why should the Central and state governments profiteer from rising crude prices abroad? The plain truth is that the price per litre of petrol and diesel in Bangalore is Rs.19.81 given the landed pre-tax price of crude of Rs.3,150 per barrel. After allowing refining and transportation costs at 10 percent per litre, the pre-tax price per litre of diesel and petrol in the city is Rs.21.79 on the calculation that each barrel translates into 159 litres of petrol/diesel. Against this the consumer pays Rs.55.15 for petrol and Rs.36.55 for diesel. And given that retailers margins are a minuscule 40-80 paise per litre, the huge margin between the pre-tax and pump prices is being siphoned away by government. The sky-high taxes paid by the public on petroleum products would be justifiable if the public derived any worthwhile government services in return. But with the Union and state governments running massive revenue account deficits, e.g the Union government cannot meet its own establishment expenses from the huge amount of Rs.403,465 crore raised by way of taxes annually, it’s a foregone conclusion that the additional taxes mobilised will be frittered away in unproductive government expenditure. The primary function of government should be to protect citizens against higher prices demanded by foreign suppliers of essential commodities. Instead it has chosen the soft option of passing on the burden of higher international crude oil prices to India’s poor (by way of cascading inflation). Occasionally me-first government must…