As demand recovered, the spike in global oil prices pushed petrol and diesel prices to an
India imports a major part (around 70%) of its crude oil requirement. The import bill was around Rs 4,70,000 crore for the Financial year 2016-17. The average price of the Indian basket of crude in 2015-16 was $ 46.17/barrel, the lowest since 2004-05. (1 barrel of crude = 159 liters )
The decline in crude oil prices helps the government manage its finances better as it translates into lower subsidies on petroleum products (LPG and kerosene), thereby resulting in a lower fiscal deficit.
The Taxes on petrol and diesel, in the form of Excise Duty (levied by the Central govt) and VAT (by States) account for almost 40 to 50% of the total cost price of petroleum products in India.
So, the central govt and State Govts get a lot of revenue through Excise Duty and VAT/State Sales Tax respectively. So, any reduction in the rate of taxes and duties will have an impact on the revenue collections of the Govt.
Even after recent excise and VAT cuts, prices for petrol and diesel at Rs 70s per liter and around Rs 58 per liter, stand close to their three-year highs. Over these last three years, global crude prices have halved from around USD 110 per barrel to USD 56 per barrel. This effectively means that we (Indian consumers) are paying almost the same for petrol and diesel when crude was at USD 110/barrel.
In case, the Govt brings in petrol and diesel under the purview of GST, what would be the impact on their prices?
As of now, there are four slabs under GST i.e., 5%, 12%, 18%, and 28%. Even if we assume Govt to put petrol in the highest bracket of 28%, due to fear of exchequer loss and Diesel in say 18, we can expect lower prices on Diesel and petrol.
The price of oil and inflation are often seen as being connected in a cause-and-effect relationship. As fuel prices move up or down, inflation follows in the same direction. The inclusion of petrol and diesel under GST can lead to lower fuel prices, which in turn can pull down the inflation rate. This can have a direct impact on gross household savings and people can have a higher investible surplus.
If Govt implements GST for Petrol and diesel and also compensates the States to a certain extent then it will have to take a huge hit on its revenues which could impact infrastructure spending / economic growth. The Govt has to find an alternative source of revenue, until then, I believe that it will continue to play ‘heads I win, tails you lose’ with the consumer.
We also need to watch out for the international oil prices. They have recovered more than 65% from their recent low levels in January (2017). However, they are still 60% below their 2014 peak. Going forward, potential supply discipline by OPEC countries and global demand scenario will be the crucial factors that would drive the movement of oil prices.
