## Why Indians Pay Such a High Price for Petrol and Diesel

At the end of every month, the Controller General of Accounts (CGA) declares the revenue and the expenses of the central government up until the last month. Hence, on September 30, the CGA declared the revenue and the expenses of the central government between April 1 and August 31.

Take a look at the following chart. It plots the decrease in gross tax revenue between April and August 2020 in comparison to the same period in 2019. The major taxes collected by the central government are income tax that you and I pay, corporate tax (income tax paid by corporates), customs duties, central goods and services tax, goods and services tax compensation cess and excise duties.

They all fall down

Source: Centre for Monitoring Indian Economy.

As can be seen in the above chart, the collections of all taxes have come down. The gross tax revenue is down 23.7% to Rs 5.04 lakh crore. Only one tax and that is excise duty, has grown during the course of this year. The growth is a huge 32.05% to Rs 1 lakh crore.

Given the economic contraction this year, it is hardly surprising that tax collections have crashed. The question is how has the collection of excise duties increased by almost a third?

This is primarily because of the central government increasing the excise duty it charges on petrol and diesel. This has been done twice in 2020. First in March and then again in May.

The excise duty on petrol stood at Rs 19.98 per litre, when it was increased by Rs 3 per litre in March and then again by Rs 10 per litre in May and now stands at Rs 32.98 per litre. When it comes to diesel, the excise duty on it stood at Rs 15.83 per litre in March. It was increased by Rs 3 per litre in March and Rs 13 per litre in May.

Take a look at the following table. It provides the price build up of petrol in Delhi as of March 1 and as of October 1.

High and low.

Source: Indian Oil Corporation.

This table makes for a very interesting reading. Let’s first understand how the mathematics of this works out using the data as of October 1.

The price charged to dealers is Rs 25.68 per litre. On this, the central government charges an excise duty of Rs 32.98 per litre. There is a dealer commission of Rs 3.69 per litre. Adding the price charged to dealers (Rs 25.98), the excise duty (Rs 32.98) and the dealer commission (Rs 3.69), we get a price of Rs 62.35 per litre. On this the local Delhi government charges a value added tax of 30%. This works out to Rs 18.71 per litre in this case.

Adding the value added tax, we get the retail selling price of Rs 81.06 per litre. The maths for the price as of March 1, works similarly, the difference being in the numbers and the taxes.

In March, the price of Indian basket of crude oil was around \$55 per barrel. The latest price of the Indian basket of crude oil is around \$41 per barrel. This is reflected in the fact that the price charged to dealers as of October 1, stood at Rs 25.68 per litre, lower than the Rs 32.93 per litre charged in March.

Despite the higher price charged to dealers, the retail selling price of petrol in March was at Rs 71.71 per litre as against Rs 81.06 per litre in October. The price as of today is 13% higher than that in March.

What’s happening here? Let’s take a look at it pointwise.

1)  The total excise duty on petrol was at Rs 19.98 per litre in March. It has since gone up to Rs 32.98 per litre, Rs 13 per litre extra. This adds to the retail price.

2) The value added tax charged by the Delhi government has also increased from 27% to 30%. This also adds to the retail price though not as much as the increase in excise duties.

3) As of March 1, taxes amounted to Rs 35.23 per litre (excise duties + value added tax). This was against a price charged to dealers of Rs 32.93 per litre. Taxes amounted to 107% of the price charged to dealers.

As of October 1, taxes amount to Rs 51.69 per litre (excise duties + value added tax). This is against a price charged to dealers of Rs 25.68 per litre. Taxes now amount to 201% of the priced charged to dealers. This explains the higher retail price of petrol, despite the lower price charged to dealers, thanks to a lower oil price.

4) There is another way of looking at this data. In March, the total taxes amounted to around 49% of the retail price. In October, they amount to around 64% of the retail price. There has been a substantial increase in taxes.

5) The reason behind this increase is that the central government needs to meet its expenditure from somewhere. One point that often gets made on the social media is that the central government shares the increase in excise duties with the state governments. This isn’t totally true.

In May, the excise duty on petrol was hiked by Rs 10 per litre. Of this hike, the hike in road and infrastructure cess (additional excise duty) was Rs 8 per litre. Given that this is a cess, it need not be shared with the state governments. Hence, the bulk of the increase has stayed with the central government.

Now let’s take a look at diesel pointwise. In this case, I am taking diesel price in Delhi as of February 12. I couldn’t find the data for March 1. But the logic remains entirely the same.

1) The price of diesel as of February 12 was Rs 64.87 per litre. As of October 1, it stands at Rs 70.53 per litre. This despite lower oil prices.

2) The total excise duty on diesel back then was Rs 15.83 per litre. Currently, it stands at Rs 31.83 per litre. This has added to the price of diesel.

3) As of February 1, the price charged to dealers was Rs 36.98. The excise duty was Rs 15.83 per litre. The value added tax worked out to Rs 9.56 per litre. Hence, total taxes (excise duty + value added tax) worked out to Rs 25.39 per litre or around 69% of the price charged to dealers.

As of October 1, the excise duty is at Rs 31.83 per litre whereas the value added tax works out to Rs 10.37 per litre. Hence, total taxes work out to Rs 42.2 per litre or 164% of the price charged to dealers.

4) Total taxes amounted to 39% of the retail price in February. They now work out to 60%.

5) In May, the excise duty on diesel was hiked by Rs 13 per litre.  Of this hike, the hike in road and infrastructure cess (additional excise duty) was Rs 8 per litre. Given that this is a cess, it need not be shared with state governments. Hence, the bulk of the increase has stayed with the central government.

This explains why you and I are paying a higher amount per litre of petrol and diesel, despite oil prices being lower from the time the covid-pandemic struck. Also, it needs to be mentioned here that the consumption of petroleum products has fallen every month between April and August. The following chart plots the same.

The Great Fall

The interesting thing here is that thanks to a higher excise duty per litre of petrol and diesel, the collection of excise duties has risen, despite fall in consumption. Also, the other interesting bit here is that the consumption decline was at 8.4% in June. The situation has worsened since then.

In the last six years, the government hasn’t passed on the fall in the price of oil to the end consumer. In May 2014, when Narendra Modi took over as prime minister, the average price of  the Indian basket of crude oil during the month was \$106.85 per barrel. The following chart plots the average price of the Indian basket of crude oil during a particular year, over the years.

Oil not on boil

Source: Petroleum Planning and Analysis Cell. (https://www.ppac.gov.in/content/149_1_PricesPetroleum.aspx).  *Between April and August 2020.

The above chart makes for a very interesting reading. The average price of the Indian basket of crude oil in 2020-21 at \$35.74 per barrel, has been the lowest since 2003-04. But that is clearly not reflected in the retail price of petrol and diesel, thanks to higher taxes, particularly higher excise duties.

A May 2020 report by the Press Trust of India points out: “The tax on petrol was Rs 9.48 per litre when the Modi government took office in 2014 and that on diesel was Rs 3.56 a litre.” The Modi government has captured a bulk of the fall in price of oil over the years. This is clearly reflected in the following chart, which plots the excise duty earned by the government from petroleum products.

Up, up and away.

Source: Petroleum Planning and Analysis Cell. (https://www.ppac.gov.in/content/149_1_PricesPetroleum.aspx). *Between April and June 2020.

As can be seen from the above chart, the excise duty earned from petrol and diesel has more than doubled over the years. While, the government has captured a bulk of the fall in oil prices, there are no guarantees that it will protect the consumer, if and when oil prices start to go up again.

Also, this is a very easy way for the government to collect revenue. It allows them to go slow on more difficult ways, like selling stakes in public sector enterprises (PSEs), selling the massive land owned by PSEs, shutting down the badly run PSEs, fixing the badly implemented goods and services tax system, and so on.

Take a look at the following chart which compares India’s petrol and diesel prices with that of our neighbouring countries.

The Indian high

Source: Websites of oil companies in these different countries. Nepal prices from local newspapers.
(I would like to thank Chintan Patel for putting this table together).
Prices as of October 1, 2020.

The above chart clearly shows that the petrol and diesel prices are the highest in India. And as they say, there is no free lunch in economics. You and I are paying this higher price, not just when we buy petrol and diesel directly, but also when we pay for almost every product that is produced somewhere and delivered to where we are.

## The Modi Govt is Finally Unleashing the Power of Executive Action

Any stock market survives on two things—hope and stories.

Sometimes both hope and stories run parallelly.

Sometimes the stories run out and hope takes over. Sometimes the hope runs out and the stories take over.

When Narendra Modi was elected as the prime minister of India in May 2014, there was great hope among stock market investors that he would unleash a new wave of economic reform that would fast-forward the economic reforms process started in 1991.

But nothing of that sort happened. As economist Vijay Joshi writes in India’s Long Road—The Search for Prosperity: “There can be little doubt that the Partial Reform Model has left India unprepared.”

The country is unprepared to take on the challenges that lie ahead, the biggest among them being the fact that nearly one million individuals will enter the workforce every month, over the next decade and a half.

For the stock market investors, the story did not turn out the way it was expected to. Initially, they went back to hoping that some economic reforms will be initiated. When that did not turn out to be the case, they found another story to explain to themselves, and anyone else who was ready to listen, why things hadn’t turned out as expected.

This time the story was that the Modi government did not have majority in the Rajya Sabha and given this, the Congress party was in a position to block key legislation, which they did. What they forgot to tell us was that the Bhartiya Janata Party had behaved along similar lines in the past when it was in the opposition.

As Joshi writes: “Lack of a majority in the Rajya Sabha is also not a completely new problem: other governments in the past have faced it quite successfully by using their negotiating skills. It was therefore widely expected that the new government would undertake a programme of sweeping economic reform.” Nevertheless that did not happen.

Also, every reform does not need a legislation. As Joshi puts it: “Quite a lot can be done without new legislation, simply on the basis of ‘executive action’.” An executive action of the government unlike a new legislation does not need the approval of the Parliament.

The Modi government has started to unleash the power of executive action in the recent past and that is a good thing. Here are a few things that it has done in the recent past and plans to do in the days to come, which should work well for the Indian economy.

a) Starting this month, the government has allowed oil marketing companies to increase kerosene prices by 25 paisa every month, up until April 2017. This will result in a saving of Rs 2.25 per litre (25 paisa multiplied by nine months) of kerosene sold during the current financial year.

The strategy is similar to the previous Congress led United Progressive Alliance government allowing the oil marketing companies to increase the price of diesel by 50 paisa every month. It was ultimately this strategy which helped the Modi government to deregulate diesel in October 2014.

The under-recovery on diesel for the month of July 2016 stands at Rs 13.12 per litre. The Bank of America-Merrill Lynch expects that this gradual increase in prices will lead to savings of Rs 1,100 crore for the government during this financial year. If the price increase continues in 2017-2018 as well, then the government will see savings of another Rs 2,400 crore.

While this is not a huge amount, it is a step in the right direction. Also, it needs to be pointed out here that 46 per cent of kerosene distributed through the public distribution system does not reach those it is intended for. The leakage into the open market is used to adulterate diesel and is also smuggled into neighbouring countries.

b) In June, the government had introduced some reforms in the textile sector through executive action. The government re-introduced the concept of a fixed term contract which allows textile companies to hire workers for a fixed period, instead of offering permanent employment.

Up until now companies had been hiring contract workers, who in many cases are not paid as much as permanent workers are, even though the work being done is exactly the same. The fixed term contracts will also allow companies the flexibility to hire according to their demand. And they won’t have to keep workers on the rolls even when they don’t actually need them.

This should help create employment in the low-skilled workers space, which is India’s natural competitive advantage and that is precisely what India wants. (You can read the complete article here).

c) Another good decision is the government’s move to invite merchant bankers to sell shares of 51 companies that it holds through the Specified Undertaking of Unit Trust of India(SUUTI). The SUUTI was formed in 2003 to bailout the investors of US-64, the flagship scheme of the UTI.

The government owns companies like ITC, Axis Bank and L&T, through SUUTI. And it’s time the government sold these shares to raise some money. Also, it is important how this money is used. Instead of simply going into the general coffers of the government, it should be specifically earmarked towards creating better physical infrastructure.

In fact, as I write this, there is a report in the Mint which suggests that the government will get the Life Insurance Corporation of India to pick up a major portion of the shares held by SUUTI. The Mint quotes an official as saying:LIC has been asked to pick up at least a third of the overall SUUTI holdings. This primarily includes (its holdings in) ITC, Axis Bank and L&T. The cost of the deal could be Rs 25,000-30,000 crore for LIC.”

If anything of this sort happens this will dilute the entire idea of the government selling out shares held by SUUTI, lock, stock and barrel. Basically money will move from one arm of the government to another. It is estimated that the current value of shares held by SUUTI is around Rs 60,000 crore.

d) A news report in the Swarajya Mag suggests that the NITI Aayog has recommended that “as many as 16 PSUs” be put up for strategic sale and 26 others be closed down. If the government does get around to doing this, it will be a huge thing. A lot of money that is currently being wasted will no longer be wasted. The loss making public sector enterprises lost more than Rs 27,000 crore in 2014-2015.

Other than money being saved, it will also give the government more bandwidth to concentrate on more important things than looking after loss making public sector enterprises.

The column originally appeared in Vivek Kaul’s Diary on July 14, 2016

## The Rs 90,000 crore Consumer Spending Kicker That the Govt Missed Out On

The Narendra Modi government has increased the excise duty on petrol and diesel nine times since November 2014.

This has ensured that the benefit of falling oil prices has not been totally passed on to end consumers in the form of lower petrol and diesel prices. What has not helped is that the state governments have also increased their share of taxes on petrol and diesel and ensured that the benefits of lower oil prices have not been totally passed on to the citizens of this country.

A press release put out by the Bhartiya Janata Party in February 2016 said that all state governments except Mizoram, Assam, Tamil Nadu, Chhattisgarh and Gujarat, had increased the value added tax on petrol and diesel.

Hence, the increase in excise duty on petrol and diesel, is not the only reason for an increase in the price of petrol and diesel.

Having said that, what would have happened if the benefit of lower oil prices had been totally passed on to the end consumers in the form of lower petrol and diesel prices? Dr Soumya Kanti Ghosh, the chief economic adviser of State Bank of India, has done an in-teresting calculation on this.

As he writes in a recent research note titled If Wishes Were Horses: Even though international oil prices are at a decade low, yet Government has increased excise duty both in petrol and diesel. So, we made an attempt to calculate total savings of the consumers if Government would not have hiked the excise duty on petrol and diesel products.”

So what does Ghosh’s calculation tell us? As he writes: “By removing only additional central excise duty from petrol and diesel retail selling prices, the hypothetical petrol price per litre would be Rs 47.63 (Actual: Rs 59.63), and diesel would be Rs 38.96 a litre (Actual: Rs 44.96)…If we assume that the consumption of petrol and diesel in FY16 of 95.28 MMT (Apr-Jan: 79.4 MMT), this would have translated into Rs 90,000 crore of savings for the consumers, which could have provided additional demand in the economy to the extent of 1% of GDP….In effect, this means that if wishes were horses, the decline in oil prices in itself may have provided the much needed impetus to demand and we may not have to wait for the pay hikes!” (MMT = million metric tonnes).

This means that if the central government wouldn’t have increased the excise duty on petrol and diesel, consumers would have benefitted to the tune of Rs 90,000 crore. This money would have been spent and pushed up consumer demand to the extent of 1% of GDP. And that would have been a huge thing. As is well known the multiplier effect of consumer spending is significantly better than that of government spending, where leakages are huge.

Of course, if the government did do things along these lines, it would have meant that the fiscal deficit of the government would have gone up. The fiscal deficit is the difference between what a government earns and what it spends. If the government gave up taxes to the tune of Rs 90,000 crore (actually lesser than this, but I will come to it), it’s earnings would have fallen, leading to an increase in its fiscal deficit.

Actually, the increase in fiscal deficit would be lower than Rs 90,000 crore. This is because the increase in consumer demand due to excise duty on petrol and diesel not being raised, would also bring in some money to the government in the form of both direct and indirect taxes.

Further, there were other ways through which the government could look at bringing down its fiscal deficit. For starters, it owns 11.19% stake in the cigarette maker ITC. This stake as on March 21, 2016, was worth a little over Rs 29,600 crore. Why does the government, which runs anti-tobacco advertisements, continue to own a cigarette maker? (I know I keep repeating this point like a broken record).

This stake could have been sold and a significant portion of the increase in fiscal deficit could have been covered. Those who like to support the government on all issues like to point out that ownership of shares of ITC brings in a dividend for the government. Hence, why let go of this regular income?

The question to ask here is what is the dividend yield of ITC? The dividend of ITC is 1.7%. Dividend yield is the total dividend the company has paid out during the year divided by its current market price. The dividend yield of ITC is less than half of the return of 4% available on a savings bank account. Given this, the dividend argument clearly does not work.

Also, the government continues to run many loss making companies. The Economic Survey for 2015-2016 released before the budget points out that public sector enterprises have accumulated losses of Rs 1.04 lakh crore. The government keeps bearing these losses. And the funny thing is that some of these losses are not even a part of the budget.

As economist Jaimini Bhagwati recently wrote in the Business Standard: “Funds will be provided to support continued losses in public sector undertakings including Indian Railways, some of which are not part of the Budget.”

If these loss making companies are shut down and their assets (primarily land) gradually monetised, it will tremendously benefit the government. The government has made some noises along these lines.

As the finance minister Arun Jaitley said in his budget speech: “A new policy for management of Government investment in Public Sector Enterprises, including disinvestment and strategic sale, has been approved. We have to leverage the assets of central public sector enterprises(CPSEs) for generation of resources for investment in new projects. We will encourage CPSEs to divest individual assets like land, manufacturing units, etc. to release their asset value for making investment in new projects.” Let’s hope this doesn’t just end up as a paragraph in a finance minister’s speech.

The disinvestment target at the beginning of the year was set at Rs 69,500 crore. Only Rs 25,312.60 crore was achieved. Hence, if the government had made an effort to earn money through these routes, it wouldn’t have had to increase the excise duty on petrol and diesel, nine times since November 2014.

Also, it needs to be pointed out here is that not all the savings on account of lower petrol and diesel prices, on account of government not raising the excise duty, would have translated into consumer spending.

Some of it is bound to have found its way into bank accounts and other financial savings instruments. Even that is a good thing given that household financial savings have been falling over the years. In 2007-2008, the household financial savings had stood at 11.2% of the gross domestic product (GDP). By 2011-2012, they had fallen to 7.4% of GDP. Since then they have risen marginally. In 2014-2015, the household financial savings stood at 7.7% of GDP.

A higher household financial savings ratio would have worked towards lower interest rates over the long term. Further, the government may not have been able to fund the entire shortfall of Rs 90,000 crore through these ways. Nevertheless, a good portion could have been filled in through the methods highlighted above.

This means that the government would not have had to increase the excise duty nine times. Possibly, four or five times would have been enough. Nevertheless, making money by simply raising excise duty on petrol and diesel was the easy way out, and who doesn’t like to take the easy way out.

The column appeared in Vivek Kaul’s Diary on March 22, 2016

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

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.

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)

 Subsidy 2012-13 2013-14 2014-15 2015-16 RE Food 85000 92000 117671 139419 Fertilizer 65613 67339 71076 72438 Petroleum 96880 85378 60269 30000 Other 9586 9915 9242 15944 Total 257079 254632 258258 257801 RE=Revised Estimates

Source: http://pib.nic.in/newsite/PrintRelease.aspx?relid=137493

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.

The column originally appeared on Vivek Kaul’s Diary on March 18, 2016

## Oil is Now Half the Price of Bottled Water in India, but Only for Govt

In my Diary dated January 15, 2016
, I had said that I expect the government to increase the excise duty on petrol and diesel soon. On that very evening, the central bureau of excise and customs, which comes under the ministry of finance led by Arun Jaitley, increased the excise duty on both petrol as well as diesel. This after the price of the Indian basket of crude oil had fallen to \$26.43 per barrel on January 14, 2016.

This is the eight increase in excise duty on customs and excise since November 2014. The first increase had happened on November 12, 2014. With the latest increase the excise duty on petrol stands at Rs 8.48 per litre. Between November 2014 and now, the excise duty on unbranded petrol has gone up by Rs 7.28 per litre or a whopping 607%.

With the latest increase the excise duty on unbranded diesel stands at Rs 9.83 per litre. Between November 2014 and now, the excise duty on unbranded diesel has gone up by Rs 8.37 per litre or a whopping 573%.

The government has clearly captured in a large chunk of the gain because of lower oil prices. As on January 16, 2016, the price of petrol in Mumbai stood at Rs 66.09 per litre. In November 2014, when the excise duty was raised for the first time, the price of petrol in Mumbai had stood at Rs 71.91 per litre. Hence, for the end consumer, the price of petrol in the city has fallen by 8.1%.

As on January 16, 2016, the price of diesel in Mumbai stood at Rs 51.25 per litre. In November 2014, the price of diesel in Mumbai was at Rs 61.04 per litre. Hence, for the end consumer, the price of diesel in the city has fallen by 16%.

How much has oil fallen by during the same period? As on November 11, 2014 (a day before the excise duty on petrol and diesel was raised by the Narendra Modi government for the first time), the price of the Indian basket of crude oil was at \$79.11 per barrel. By January 14, the price had fallen to \$26.43 per barrel or close to 67%.

In rupee terms the price of oil has fallen by close to 64%. But the price of petrol and diesel has fallen by only 8.1% and 16%. In fact, if we look at the price of oil in rupee terms, we can come to a very interesting conclusion.

As on January 14, 2016, the price of the Indian basket of crude oil was at Rs 1,773.19 per barrel. One oil barrel is basically 159 litres. This means that one litre of the Indian basket of crude oil costs around Rs 11.2 per litre. One litre of bottled water (or what we call Bisleri at the generic level) typically costs Rs 20 per litre. Given this, bottled water in India is now nearly twice as expensive as oil. Or to put it in another way, oil is now half the price of that of bottled water, but only for the government. You and me have missed out on this party.

Of course, these gains haven’t been passed on to the end consumer and have been captured by the government. Interestingly, petrol prices since February 2015, have actually gone up. The price of petrol in Mumbai as on February 4, 2015, was at Rs 63.9 per litre, whereas currently it is at Rs 66.09 per litre. The price of the Indian basket of crude oil was at \$54.97 per barrel on February 4, 2015. It has since then fallen by more than 50% to \$26.43 per barrel.

One of the points that typically gets made in favour of the government increasing excise duty on petrol and diesel is that these fuels pollute and need to be taxed in order to protect the environment.

Data from Centre for Monitoring Indian Economy(CMIE) points out that between January and December 2014 a total of 18,385 thousand tonnes of petrol was consumed in the country. Between January and December 2015, a total of 21,089 thousand tonnes of petrol was consumed within the country. This was around 14.7% more.

A major portion of this would have come from an increase in new vehicles which run on petrol. If one takes this into account, then the consumption of petrol during the last one year, has not gone up significantly, and this despite lower prices.

How do things stand with diesel? Between January and December 2014, the total amount of diesel consumed in the country stood at 69,022 thousand tonnes. Between January and December 2015, the total amount of diesel consumed in the country stood at 72,652 thousand tonnes or 5.3% more than the previous year.

Again, if we adjust for newer diesel vehicles and other ways in which diesel is used, the total amount of diesel consumed in the country didn’t go up significantly, despite lower prices. What this tells us is that the increase in consumption of petrol and diesel has happened because of new vehicles and not because of lower prices.

So does this mean that the government will now clamp down on the production of new vehicles or increase taxes on them to make them more expensive for people to buy them and in the process control pollution?

Also, if the government was serious about pollution, why has the price differential between petrol and diesel gone up in the last 15 months? In November 2014, the difference between the price of petrol and diesel was at Rs 10.87 per litre. Now the difference stands at Rs 14.84 per litre. This raises the question that why is the government incentivising diesel, which pollutes more?

Further, the bigger question that no one in government seems to be ready to answer is what happens when oil prices start to go up again? Given that the government hasn’t passed on the bulk of the fall in price of oil to the end consumer, it is only fair that it does not pass on an increase in prices as well, as and when it happens.

In that scenario where will the government get the money for to continue to finance its expenditure? This is something that Arun Jaitley, who I call the excise duty hike minister these days, needs to answer. Or will the government increase the price of petrol and diesel, something the Bhartiya Janata Party (BJP) had majorly protested against when it was in the opposition.
Postscript: In order to understand why the government is increasing the excise duty on petrol and diesel, read this: Happy new year folks: The govt has increased excise duty on petrol and diesel again!

The column originally appeared on the Vivek Kaul Diary on January 19, 2016