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When Oil Price Falls, Excise Duty Goes Up. When It Rises, Petrol/Diesel Prices Go Up.

Mar 18, 2016


Petrol and diesel prices have gone up. This time the prices were increased by the oil marketing companies (OMCs).

The Indian Oil Corporation (IOC), one of the OMCs, said in a press release that it has decided to "increase in Retail Selling Price of Petrol by Rs. 3.07/litre at Delhi (including State levies) with corresponding price revision in other States."

At the same time, it has decided to increase the "Retail Selling Price of Diesel by Rs. 1.90/litre at Delhi (including State levies) with corresponding price revision in other States." The increase came in effect from the midnight of March 16-March 17, 2016.

The price of oil has been going up over the last few weeks. As on February 11, 2016 the price of the Indian barrel of crude oil was at $26.95 per barrel. Between then and March 16, the price of the Indian basket of crude oil has gone up by 34% to $36.10 per barrel.

In rupee terms also the increase in prices has been more or less similar. The price of one barrel of crude oil has one up by around 32.7% to Rs 2431.94.

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This increase in price has forced the oil marketing companies to increase the price of petrol and diesel. As the IOC said in its press release: "The current level of international product prices of Petrol & Diesel and INR-USD exchange rate warrant increase in price of Petrol and Diesel, the impact of which is being passed on to the consumers with this price revision."

In any other market this would have been a fair deal. If the price of the input goes up (i.e. oil in this case), the price of the output (i.e. petrol and diesel in this case) goes up as well. But the Indian oil products market is anything but fair.

When the price of oil was falling, the central government and the state governments captured the major portion of the fall, by increasing taxes which are built into the price of petrol and diesel. Since November 2015, the central government has increased the excise duty on petrol and diesel, five times.

This basically means that when the oil price falls, the governments capture the major part of the benefit. But when they go up, the consumer has to pay for it. How is this fair in any way? Also, what happens if oil prices continue to go up, will the entire increase in price be continued to be passed on to the consumers? If the government did not pass on the total fall in oil prices to the consumer, it is only fair that it doesn't pass on the entire increase as well.

The point being that the consumer has to pay both ways, when the prices come down and when they are going up.

One logic offered by those who like to defend the government on anything and everything, is that the money coming in through the increase in excise duty on petrol and diesel, is being used for farmers. This conclusion possibly comes from the tone of the finance minister Arun Jaitley's budget speech. But is this true?

Economist Ashok Gulati exposes this sleight of hand by the government in a column in The Indian Express. As he points: "The allocation for the Department of Agriculture, Cooperation and Farmers' Welfare (DoA), is raised from the revised estimate (RE) of Rs 15,809 crore in FY16 to a budgeted estimate (BE) of Rs 35,983 crore for FY17, a whopping increase of 127 per cent! This would make anyone jump and conclude what a wonderful stroke the finance minister has played for farmers. But hold on. There's a catch. Much of the increase (Rs 15,000 crore) is due to interest subsidy on short-term credit. Earlier, this subsidy was Rs 13,000 crore and was shown under the Department of Financial Services. Now, it's transferred to the DoA."

So where is the money raised through the increase in excise duties and the money saved because of a fall in oil prices essentially going? Jayant Sinha, the minister of state in the finance ministry, recently explained this in a written reply to a question in Lok Sabha.

Details of Subsidies (Rs. in crore)
Subsidy2012-132013-142014-152015-16 RE
RE=Revised Estimates


Take a look at the above table. The petroleum subsidy has fallen from Rs 96,880 crore in 2012-2013 to Rs 30,000 crore in 2015-2016. The OMCs currently suffer under-recoveries every time they sell kerosene and domestic cooking gas. In March 2016, the under-recovery on kerosene stood at Rs 6.58 per litre. The government compensates the OMCs for these under-recoveries and this shows up under the petroleum subsidy head.

Despite the fall in petroleum subsidies, the total subsidy bill of the government has barely changed. It has slightly increased from Rs 2,57,079 crore in 2012-2013 to Rs 2,57,801 crore in 2015-2016.

What the table shows clearly is that the fall in petroleum subsidies has been more or less been made up for by an increase in food subsidies. The food subsidy bill of the government has jumped from Rs 85,000 crore to Rs 1,39,419 crore.

As I have discussed in previous columns, the food subsidy regime in India is very leaky. A major portion of the rice, wheat and sugar which are distributed through it, are siphoned off, by the owners of the fair price shops through which the distribution takes place. The government is trying to plug this leak by ensuring that in the days to come, the subsidy is paid directly into the bank account of the targeted beneficiaries.

As Sinha said: "In cash transfer, the benefit is transferred in the beneficiary's account, preferably Aadhaar seeded. Presently, LPG subsidy is transferred directly in to the bank accounts of beneficiaries. Food subsidy in cash is disbursed in wo Union Territories viz, Puducherry and Chandigarh, directly in beneficiaries' bank accounts, in kind, after biometric authentication, in 70000 fair price shops at present."

The government also has plans to pay out fertilizer subsidy directly during the next financial year in a few districts across the country on a pilot basis. This is a good move and I sincerely hope that the government meets more and more success on this front. The subsidies will reach the intended beneficiaries and will benefit the Indian economy in the process.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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8 Responses to "When Oil Price Falls, Excise Duty Goes Up. When It Rises, Petrol/Diesel Prices Go Up."


Mar 21, 2016

I don't know why people are ranting about "it's good to increase Petrol Price". We are living in a global economy and these measures just put hand of govt. In each and everything. When govt. Has decided to deregulate prices than these measures to not pass on the decrease in the price is certainly not fair!!.
And you'd like to remove corruption by losing Freedom. Why not go to North Korea, there is no corruption. Enjoy your stay there.

Like (1)

C K Vaidya

Mar 18, 2016

I wonder what Mr. Vivek Kaul is complaining about. He points out that total subsidies haven't come down due to increasing food subsidy. He further agrees that direct cash transfer which the Government is piloting is the right answer. Till direct transfer of subsidies results in lower subsidy bill, what can the government do?
Already, many influential voices have started complaining about Aadhaar bill on the pretext of right to privacy and so on! Vivek Kaul should strongly support direct transfer instead of cribbing about petrol/diesel prices being raised when Global prices have risen sharply.
I hasten to add that it's nobody's case that privacy and individual freedom should be compromised. Experts should guide the government on how misuse of Aadhaar data can be controlled and build pressure on government if it's not listening to expert advice. I will any day compromise on privacy/freedom to eradicate corruption.

Like (1)


Mar 18, 2016

While the Direct Benefit Transfer of cash into bank accounts will plug leakages in the PDS, it is likely to cause greater stress to those below Poverty Line because (a) it's value will be the of the items (rice kerosene)at the current PDS rates - the same items available in the market are at a higher rate, and as the PDS is reduced / wound up, the BPL will have to purchase from the market using additional resources (b) there is no provision for a food inflation-indexation of the value of the cash transferred. Your comments on this will be appreciated

Like (1)


Mar 18, 2016

The cosntant rant against the govt is akin to rebellious teenagers and lacks intellectual honesty and maturity. Either judge the govts actions by their efforts or the results.

Like (1)

Vijay Malhotra

Mar 18, 2016


The policy of partially increasing excise duty to some extent can be justified, if the money generated is put to some good use and not for doling out sops in various names.

However, when the prices increase the prorata excise duty reduction must be done.

Here now if the prices of crude have gone up it is primarily due to fall in $ value. But one must keep in mind that in the same proportion the value of rupee has gone up and from near 69 to a $ it is today trading at 66.50 or so. Thus the oil companies have benefitted both ways: increasing price as well buying cheaper dollars.

Oil minister must look into the whole affair and give a reply to the people.

Like (1)

Rajanikanta Verma

Mar 18, 2016

You are perfectly correct in urging that the food subsidy (and other subsidies) should reach their intended beneficiaries and not "leak" on their way to dishonest middlemen.
However, it is difficult to fault the Government for collecting revenue by increasing he excise on petrol/diesel to increase the subsidy on food. If the price of fossil fuel goes up it is reasonable to expect that the demand for it would come down. Surely, this would be good for the environment and also for our economy which imports two-thirds of its crude requirement. And the food subsidy reaches the needy while the petrol/diesel is used by those who are much better off.

Like (1)


Mar 18, 2016

Very good article !! Very informative as always from Mr. Kaul!

Like (1)

Deepak Obero

Mar 18, 2016

Why not bureaucratic expenses are reduced by Oil Companies instead passing the bucks to the consumer. Oil prices to be the proportionate to international price without any subsidy so that rational use of oil can be done. Also consumer are burdened with wastage of oil due to encroachment of footpath and slow moving vehicles running on Road. Once I read in some newspaper that if Footpaths and encroachments are removed in the Metros, Import bill of oil can be reduced to 20-25%. Government should look into this and take positive steps.

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