How can the government control the growing fuel price?

Bihar charges 24.71 percent VAT on per-litre petrol and 18.34 percent on per-litre diesel. Uttar Pradesh takes 26.90 percent VAT on per-litre petrol and 16.84 percent on per-litre diesel.

If Central and State governments decide to cut back on these taxes, even by a slight margin, we could see a significant drop in the rising fuel price.

(Courtesy: Outlook India)

However, recent reports suggest that governments are in no mood to cut these taxes on petrol and diesel. It would hurt their revenue, which, honestly, not many states can afford. So many of them already highly dependent on the central treasure.

However, some states have attempted to cushion the rising fuel price in the country by agreeing to take a hurt in their revenue. At the time of writing this, three states have done: Rajasthan has reduced the price of per-litre fuel by Rs 2.5; Andhra Pradesh has reduced the price by Rs 2 per litre; and West Bengal has done this by reducing Rs 1 from per litre petrol and diesel.

As for the central government, cutting the excise on fuel would put a big pressure on the fiscal deficit. And given the deficit is already at its historic high, we don’t want to handle more. It could have many repercussions, including depreciation in the value of Indian currency against US Dollar.

So, don’t expect the centre to cut the excise—and don’t expect many states to join the line of Rajasthan, Andhra Pradesh, and West Bengal.

Another thing the government can take to combat rising fuel price in the country is to charge taxes to the domestic producers of oil. Home oil producers like ONGC, Oil Indian Limited, Hindustan Petroleum and Reliance Petroleum Limited get paid according to the international price. So, when the international price of crude oil rises, even when their cost of production remains the same, they take back home a big profit. In fact, according to a report on Business Today, in the third quarter of the last fiscal, ONGC took home a profit of Rs 5,015 crore.

(Courtesy: Rediff.com)

Now what the government can do is charge these domestic oil companies a tax or cess on their revenue, and then pass on that money generated here to the fuel retailers to cushion the high (and rising) pricing of petrol and diesel. Some insiders believe this might eventually happen once international oil price crosses the $70 mark per barrel. If this happens, we might not necessarily see a big cut in the price of petrol and diesel—but there certainly would be a pause in their rising price.

These are 2 things the government can do to deal with rising fuel price. But as of now, no one knows what measure the government will take. Reports suggest that it is hopeful that in the coming days, the oil price will be stabled and then dip. So, there’s a big chance we can see the government be a complete spectator, just like us.

It is market determined. Of course, the central and state taxes impact the demand and indirectly puts a pressure on prices. But there are no direct controls. This was not the case always. Both Petrol and Diesel prices were controlled through government subsidy before. The fuel subsidies were burning a large hole in the govt’s pocket as the crude prices sky rocketed after 2003 Iraq invasion. In order to reduce GOI’s subsidy bill, petrol price was deregulated in 2010 and Diesel price in 2014.

Now the prices are market i.e dictated by supply and demand. The components of prices today are International Crude prices, VAT and excise duty, refinery and transportation charges.