Is the fuel pricing policy problematic?

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Last Updated01/04/2022

The article assesses India's fuel pricing strategy and the problems related with it in light of the rapid spike in retail Petrol prices and LPG cylinder costs.

Global oil supplies have been squeezed as OPEC members have refused to release output quotas since COVID-19, and the Ukraine-Russia crisis has disrupted global supply systems.
The rupee has weakened, and energy imports have increased from 70% to 86-87 percent of total energy imports.
The retail costs of fuels have risen as a result of increasing excise taxes on transportation fuels and higher VAT levies in states.

The fuel pricing policy in India has changed throughout time.
In 1995-96, the government considered switching from a cost-plus administered price structure to market-determined consumer prices for petrol, diesel, and other fuels.
In 2002, the entire removal of oil pricing was announced, based on the recommendations of the Nirmal Singh Committee.
When oil prices began to rise in 2004, the then-government reinstated the cost-plus pricing scheme to help consumers. It also subsidised transportation fuels, LPG, and kerosene prices through the Oil Bonds system, which aimed to offset under-recoveries by oil marketing corporations.
Following a drop in oil prices in 2015, the government reinstated the market price system.
Given that the crude oil prices remained low, it was easy to implement the market price mechanism without giving much discomfort to the consumers.
Though India officially has a deregulated pricing regime, but in recent years, this practice has been put on hold during election campaigns. Hence there has been a stop-and-start approach to price changes despite a free pricing regime.

Several aberrations have occurred in the de-administered pricing system. Over a lengthy period of time, India has been unable to maintain a substantial de-administered pricing.
This does not argue well for India's economy since it makes it more exposed to global oil price pressures.
The Indian oil and gas sector is also suffering from this stop-and-start pricing policy for fuels, which has a negative impact on global investor interest.
Notably, the adherence to a market-determined price policy at a time when crude oil prices are at an all-time high does not bode well for India's post-pandemic economic recovery.
Fuel costs will have negative economic consequences if they are completely passed on to consumers and industrial users.
It will result in high retail inflation which lead to an adverse income effect and thus lead to a subdued consumption expenditure recovery.

A reduction in excise duties or taxes might be the only quick fix in the short run. This will make customers feel less burdened.
Though this may come at a cost to the government in terms of diminished tax collections, it is important to achieve economic recovery.
Governments should diversify their revenue sources in the long run, moving away from their strong reliance on the oil sector. India has to move away from its reliance on low fuel taxes.
A strategy for coping with the Indian economy's susceptibility to global crude price increases should also be established.

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