The Truth Behind the Fuel-Toilet Debate in India

Now social media and electronic media is full of trolls ridiculing the newly appointed Union Minister Mr Alphonse Kannanthanam and his statement about petrol, diesel sales proceeds going towards constructing toilets that did not go well with the masses.

There seems to be lot of misunderstanding about how petrol diesel prices are determined in the country. Oil Minister Mr Dharmendra Pradhan has stated that we follow the most transparent system for daily price determination of petrol and diesel.  Those who follow his Twitter posts can understand very well how misguided the critics of the BJP government are when it comes to fuel prie determination in India.

Mr Pradhan has pointed out that crude oil is just one component that determines the price of petrol and diesel. There are several other components which he hasn’t explained. At current prices of $50 a barrel, per litre cost in India would be Rs 20 based on Rs 64/Dollar exchange rate. Then how come we are paying Rs 70 plus at the retail petrol station?

Here is the break-up?

The oil marketing companies need to incur refining costs, transportation costs and most importantly taxes. Excise duty, state value added tax (VAT) and cess apart from profit margin by oil companies, dealers also have to be factored in.

We must be paying close to Rs 40 by way of taxes which neither the state governments nor the central governments can afford to forego considering the huge revenue they get from it. Minister Pradhan has also indicated in his tweets that petrol and diesel prices are trailing behind international crude oil prices in the past few months. According to him crude oil prices rose 13% in the past three months but petrol prices in India rose only 4%, global petrol prices rose 18% while domestic prices rose only 4% in the past three months.

The Toilet Debate

The statement from Mr Kannanthanam gives the impression that revenue from fuel sales would be utilised for the construction of toilets. What the government has been discussing is how far the tax revenue on account of fuel sales can be used for social welfare purposes including drinking water and sanitation. Now with international crude prices declining, there is opportunity for the government as current account deficit will narrow.

When all taxes go into the consolidated account of the government, how can oil excise duty and taxes be demarcated and used for social welfare activities is still a mystery.

However, no one can doubt the intention of the government which claims to have added 4.837 crore new toilets since 2014. Presently, about 68.21% of the population is under sanitation coverage compared to 38.70% when the government came to power three years ago.

Encourage Public Transport

The government has also stated that the fuel pricing policy provides a disincentive for more use of petrol and diesel for passenger vehicles with the goal of promoting public transport. It will curb traffic, prevent pollution and reduce dependence on fossil fuels.

The shift from administered pricing mechanism (APM) to prices based on international crude oil was expected to reduce the retail prices of fuel but consumers feel is not happening. The fluctuations in exchange rate and costs of fuel intermediates may have a bearing on the daily price movements of petrol and diesel.

Tailpiece

Politicians, social commentators, analysts and even a civil servant turned minister seem to be lacking knowledge of India’s fuel pricing and therein lies the issue. Secondly, government is now considering bringing fuel prices under the ambit of Goods and Services Tax (GST) which will bring uniform pricing across the country.