NOTES
units, (ii) oil marketing companies (OMCs),
Taxing Petroleum Products
Sharing Revenue Space between
Centre and States
D K Srivastava, Muralikrishna Bharadwaj, Tarrung Kapur, Ragini Trehan
With the lowering of global
crude prices in recent months,
the expectation was that this
would benefit the users of
petroleum products, especially
in the industry and transport
sectors, and the consumers.
This expectation has so far been
belied. The central government
has not only increased the taxes
under its control but also focused
on increasing relatively more,
the non-shareable portion of
excise duty, thereby constraining
the fiscal space for the state
governments. The continued high
retail prices have implications
for inflation as well as potential
growth. This situation needs to be
carefully monitored.
D K Srivastava (dk.srivastava@in.ey.com)
is the chief policy advisor at EY India and
an honorary professor at Madras School of
Economics, Chennai. Muralikrishna Bharadwaj
(muralikrishna.b@in.ey.com) is a senior
manager at EY India. Tarrung Kapur (tarrung.
kapur@in.ey.com) and Ragini Trehan (ragini.
trehan@in.ey.com) are managers at EY India.
74
G
lobal crude prices reached a
trough of $21/barrel (bbl) in April
2020. Since then, these increased
marginally but have remained below $40/
bbl on average. However, India’s retail
prices of petroleum, oil and lubricant
(PoL) products have remained high dur-
ing this period due to the impact of cen-
tral and state taxes. This has given rise to
the paradoxical and unexpected situa-
tion where low global crude prices have
been accompanied by high retail prices of
PoL products in India. In fact, the centre
and states have competed to share the
revenue space created by the lower glob-
al crude prices without passing on any
benefit to the consumers and the users.
The central government is in a position to
pre-emptively increase excise duties1 on
PoL products. It also has the option to
increase either the basic excise duty
which is shareable with states or special
additional excise duty and additional
excise duty which are not shareable
with the states.
The dynamics of these changes has
significant implications for the sharing
of the revenue space between the centre
and the states. This trend was driven by
erosion of the buoyancy of centre’s gross
tax revenues (GTR s) as also the weak
revenues of the states in 2019–20 and in
the current year. With both the central
and state governments increasing taxes
on PoL products under their respective
control, their retail prices have increased
in the recent months. This has the po-
tential of impacting inflation through
the cost side and may also eventually
hamper the growth momentum.
The gap between domestic prices and
global crude prices is meant to be shared
between different stakeholders. Five of
these stakeholders are: (i) oil refinery
february 27, 2021
(iii) central government, (iv) state govern-
ments, and (v) users comprising both
consumers and producers. The central and
state governments have a critical role
in the determination of the retail prices
even though these retail prices are meant
to respond to market signals. There are
significant revenue implications for the
central and state governments linked to
the central excise taxation of petroleum
products and the levy of state value-added
tax (VAT)/sales tax.
In this article, we have analysed the
relative shares of central and state taxes
on PoL products in the retail prices of
petrol and diesel in the context of their
price build-up, and examined how the
space between unit cost and retail price
gets divided between different stake-
holders, including the division of the
revenue space between the centre and
the states.
Movement of Crude Prices
Figures 1 and 2 (p 75) show the movement
of global crude prices and the Indian crude
basket over a long period of time, start-
ing from 2000–01 up to the June 2020.
Figures 1 and 2 have three parts showing
annual, quarterly and monthly prices.
The high frequency data in the more re-
cent period provides the extent and di-
rection of changes in global crude prices
compared to their historical levels.
Retail prices of PoL products in India
are based on a cost mark-up system re-
flecting margins of refiners, wholesalers
and retailers, and taxes that cascade,
covering customs, central excise and VAT.
Global crude prices are translated into
retail prices for PoL products in India
through a number of steps. First, crude oil
is imported/procured by the oil refineries
in India. At this point, crude oil is refined
into various PoL products, which are
meant to be finally used by industries and
consumers. These refined products are
supplied to the OMCs. Some of the oil
companies work as both refiners and
marketing companies. When the products
come out of the OMCs, the units of the
products are changed. On the relevant
units, ex-refinery costs are determined.
vol lVi no 9 EPW Economic & Political Weekly
 NOTES

Figure 1: Global Crude Price ($/bbl)—Annual, Quarterly and Monthly and other cost components in respect of
120 petrol and diesel in Delhi.
100 84.2
80 Sharing of Revenue Space
59.7
60 Central taxes consist of basic excise duty,
32.2
40 47.9 61.6 additional excise duty and special addi-
20 tional excise duty (SAED) on the central
0 excise on PoL products. The basic excise
2000–01
2001–02
2002–03
2003–04
2004-05
2005–06
2006–07
2007–08
2008–09
2009–10
2010–11
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
2017–18
2018–19 Q1
2018–19 Q2
2018–19 Q3
2018–19 Q4
2019–20 Q1
2019–20 Q2
October 2019

December 2019

March 2020
April 2020
May 2020
June 2020
November 2019

January 2020
February 2020
duty is shareable with the states while
the remaining two components are not.
Excise duty is levied on a specific basis
upon the price charged to dealers. State
Source (basic data): World Bank, Petroleum Planning and Analysis Cell (PPAC).
VAT is levied mainly as an ad valorem
Figure 2: Indian Crude Basket ($/bbl)—Annual, Quarterly and Monthly tax on the value arrived at by adding
120 111.9 the price charged to dealers (excluding
100 excise duty and VAT), central taxes and
74.6
80
64.3
the dealer commission. By virtue of being
60
40.6 ad valorem in nature, state VAT tends to
40 fall as the price of crude falls, given the
20
22.6
specific excise duty rate. In the case of
19.9
0 some states, VAT is a combination of ad
2000–01
2001–02
2002–03
2003–04
2004-05
2005–06
2006–07
2007–08
2008–09
2009–10
2010–11
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
2017–18
2018–19 Q1
2018–19 Q2
2018–19 Q3
2018–19 Q4
2019–20 Q1
2019–20 Q2
October 2019

December 2019

March 2020
April 2020
May 2020
June 2020
November 2019

January 2020
February 2020
valorem and specific taxes. Further, in
many states, VAT is levied on a base price
which excludes dealer’s commission.
We can analyse the relative share of
Source (basic data): World Bank, Petroleum Planning and Analysis Cell (PPAC).
the central and the state governments in
Figure 3: Process of Transition from Global Crude to Retail Selling Price of Selected POL Products the revenue space provided by petroleum
Selected refined PoL taxes in two parts: (i) before devolution
products of taxes, and (ii) after devolution. Here,
• Petrol (`/ltr)
• Diesel (`/ltr) devolution refers to the sharing of centre’s
VAT incl/excl VAT on
dealer commission basic excise duty revenue from PoL prod-
ucts which is shareable. Revenues from
Global crude Indian basket Refineries Wholesale Retail special additional excise duty and addi-
Excise
$/bbl Exchange `/bbl Refiner’s
duty
Wholesaler Retailer tional excise duty are not shareable with
rate margin margin margin states.
Customs duty Figure 4 (p 76) shows that in the pre-
and IGST
Source: Prepared by authors.
devolution situation, the centre has a
relatively larger share2 in the period cov-
Table 1: Price Build-up of Petrol and Diesel in Delhi on 1 July 2020
Sr No Elements Unit Price Share in Final Price (%)
ering 2015–16 to 2019–20, reversing its
Diesel Petrol Diesel Petrol relative position with respect to states in
1 Base price/ex-refinery price `/ltr 27.03 24.92 33.6 31.0 the years preceding this period. Prior to
2 Freight `/ltr 0.30 0.33 0.40 0.40 2015–16, the state taxes3 accounted for a
3=1+2 Price charged to dealers (excluding much larger share ranging from 58.1%
excise duty and VAT) `/ltr 27.33 25.25 33.9 31.4
to 62.3%. The non-shareable portion of
4 Central taxes (excise duty) `/ltr 31.83 32.98 39.5 41.0
5 Dealer commission (average) `/ltr 2.54 3.60 3.20 4.50
central taxes has increased beginning
6 State taxes (VAT including VAT 2017–18 with a considerable increase in
on dealer commission) `/ltr 18.83 18.56 23.4 23.1 2018–19 and 2019–20(P).
7=3+4+5+6 Retail selling price at Delhi `/ltr 80.53 80.43 100 100 Figure 5 (p 76) shows the sharing of
Source: Petroleum Planning and Analysis Cell (PPAC), Indian Oil (https://www.iocl.com/Products/PetrolDieselPrices.aspx).
revenue space after taking into account
On this base price, central excise duty is commission. After the levy of state VAT, the impact of the sharing of basic excise
levied, and dealer’s commission is also we arrive at the retail selling price of duty under the recommendations of the
added. State VAT is levied on a price that PoL products. The process of transition Thirteenth and Fourteenth Finance
includes the ex-refinery price, the central from global crude to domestic retail Commission respectively. In this case,
excise duty and the dealer’s commission. price is summarised in Figure 3. the states have received a larger share
However, in many states, VAT is levied on Table 1 provides, illustratively, the price throughout the period under considera-
a base price which excludes dealer’s build-up and the relative shares of taxes tion. It is however noticeable that the
Economic & Political Weekly EPW february 27, 2021 vol lVi no 9 75
NOTES
Figure 4: Share of the Centre and States in Total Tax Revenues from POL Products (%) excess of states’ share over that of the
70 centre started to come down sharply
59.3 61.1 62.3 59.3
60 55.6 55.3 from 2015–16 onwards. From this year,
58.1 51.6 52.7
the recommendation of the Fourteenth
50 41.9
40.7 38.9 37.7 44.4 22.3 40.7 44.7 48.4
47.3 Finance Commission which uplifted states’
40 share in divisible central taxes from 32%
27.3 28.3
30 18.2 to 42% became applicable.
18.6 17.5 16.8
20 34.2 36.9 In spite of this increase in states’ share
in the basic excise duties, the overall share
10 22.1 21.4 20.9 23.7 28.3 37.0 27.0 17.4 15.8
of the states came down because of the
0 increases in the non-shareable portion
2011–12 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18 2018–19 2019–20
of centre’s taxes on PoL products. This
Shareable central taxes Non-shareable central taxes Total excise duty State taxes
Source: Petroleum Planning and Analysis Cell (PPAC), Ministry of Petroleum and Natural Gas, GoI; Union Budgets 2013–14
difference has progressively come down
to 2018–19. since then. From a peak of 38 percentage
Figure 5: Post-devolution Share of Centre and States in Tax Revenues from POL Products points in 2013–14, this difference has now
80 40 fallen to 7.9 percentage points in 2019–20
67.9 69.0
66.4 65.6 35 indicating that the available revenue
70
30 space has largely been pre-empted by
60 56.3 56.2 56.1 55.7 54.0
the central government.
25

50 38.0 20 Sharing of VAT Revenue

35.8
32.8 31.3 In this section, we consider the sharing
43.7 43.8 44.3 46.0 15
40 43.9
of the VAT revenue from PoL products
10
30 33.6
32.1
34.4
12.6 12.5
among the states. For this purpose, we
31.0 12.1 11.5 5
7.9 have selected 10 of the relatively larger
20 0 states which account for nearly 75% of
2011–12 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18 2018–19 2019–20 (P)
the total states’ revenue from VAT on PoL
Difference (% points, RHS) Share of states (%, LHS) Share of centre (%, LHS) products (Table 2). The largest share
Source: Petroleum Planning and Analysis Cell (PPAC), Ministry of Petroleum and Natural Gas, GoI; Union Budgets 2013–14
to 2020–21. P refers to provisional data. accrues to Maharashtra followed by Uttar
Table 2: Statewise Share in Total VAT Revenue from POL Products (%) Pradesh and Tamil Nadu. This pattern
# State 2014–15 2015–16 2016–17 2017–18 2018–19 2019–20 (P) reflects the relative size of these state
1 Maharashtra 14.4 13.6 13.9 13.6 13.5 13.4 economies in terms of their share in gross
2 Uttar Pradesh 9.2 9.9 9.5 9.4 9.5 10.0 state domestic product, which also influ-
3 Tamil Nadu 9.0 7.7 7.5 8.3 9.0 9.1
ences the share of use and consumption
4 Karnataka 6.3 6.1 6.7 7.2 7.2 7.7
of PoL products in these economies. In the
5 Gujarat 11.6 10.3 9.6 8.4 8.1 7.7
6 Rajasthan 6.1 6.5 6.4 6.5 6.3 6.7
middle ranges are states like Karnataka,
7 Madhya Pradesh 5.0 5.3 5.5 5.0 4.7 5.4 Gujarat, Rajasthan and Madhya Pradesh.
8 Andhra Pradesh 6.4 5.5 5.4 5.2 5.4 5.1 These data also indicate the changes
9 Telangana 3.3 4.5 4.5 4.7 5.0 5.0 over time, in the shares of individual
10 Kerala 3.9 4.3 4.1 3.9 4.0 4.0 states. In some cases, there has been a
11 Other states/UTs 24.8 26.4 26.8 27.7 27.4 26.0 noticeable fall. This is particularly visible
Total 100.0 100.0 100.0 100.0 100.0 100.0 for Gujarat, whose share in VAT on PoL
Source: Petroleum Planning and Analysis Cell (PPAC).
products fell from 11.6% to 7.7% during
Table 3: Statewise Share in Total Sale of POL Products (%) the period 2014–15 to 2019–20 (P). There
# State 2014–15 2015–16 2016–17 2017–18 2018–19 2019–20 (P)
1 Gujarat 11.5 11.5 11.1 10.6 11.1 11.8
is some increase in the relative shares of
2 Maharashtra 11.0 11.0 11.3 11.4 11.0 10.9 Telangana, Uttar Pradesh and Rajasthan.
3 Uttar Pradesh 8.7 9.1 9.3 9.3 9.6 9.7 The relative interstate shares of sale of
4 Tamil Nadu 8.0 7.7 7.8 7.7 7.6 7.4 PoL products are also reflective of the inter-
5 Karnataka 6.3 6.7 6.7 6.9 6.9 6.9 state share of VAT on PoL products. How-
6 Rajasthan 7.1 6.8 6.4 6.2 6.0 5.7 ever, differences in these two sets of shares
7 Haryana 6.9 6.5 6.3 6.1 5.5 5.4 as shown in Tables 2 and 3 arise because
8 West Bengal 4.2 4.3 4.4 4.6 4.6 4.9
of differences in the rates and structure of
9 Madhya Pradesh 4.2 4.2 4.1 4.1 4.2 4.1
VAT on PoL products across states. In terms
10 Andhra Pradesh 4.1 3.7 3.8 3.8 4.1 4.0
11 Other states/UTs 28.0 28.6 28.9 29.3 29.3 29.2
of share in sales, Gujarat has accounted for
Total 100.0 100.0 100.0 100.0 100.0 100.0 the largest share followed by Maharashtra
Source: Petroleum Planning and Analysis Cell (PPAC). and Uttar Pradesh. Table 3 shows that the
76 february 27, 2021 vol lVi no 9 EPW Economic & Political Weekly
 NOTES
Figure 6: Trend in Share of Excise Duty and VAT in Retail Selling Price of Diesel in Delhi top 10 states account for nearly 70% of
50 the all-state sale of PoL products in India.
Share of VAT in RSP Share of excise duty in RSP Indian crude basket (`/ltr) It is noticeable that while Gujarat has the
40
highest share in sales, it does not have
30 the highest share in VAT revenues from
PoL products because of comparatively
20 lower VAT rates.

10 Comparing Incidence of VAT

and Excise Duty
0
We compare the incidence of state level VAT
June 2015

October 2015

February 2016

June 2016

October 2016

February 2017

June 2017

October 2017

February 2018

June 2018

October 2018

February 2019

June 2019

October 2019

February 2020

June 2020
on POL products vis-à-vis centre’s excise
duty which includes the basic excise duty,
Source: Petroleum Planning and Analysis Cell (PPAC), Ministry of Petroleum and Natural Gas, GoI; Union Budgets 2013–14 additional excise duty and special addi-
to 2018–19.
tional excise duty. We trace their relative
Figure 7: Trend in Share of Excise Duty and VAT in Retail Selling Price of Petrol in Delhi
50
position over time and for this purpose we
Share of excise duty in RSP have taken the tax components as appli-
Share of VAT in RSP Indian crude basket (`/ltr)
40 cable in Delhi and Mumbai for illustrative
purposes. Figures 6 and 7 provide the
30
relevant comparative profiles for petrol
20 and diesel respectively for Delhi and
Mumbai. In these figures, three variables
10 are represented namely: (i) price of Indian
crude basket (`/ltr), (ii) percentage
0
share of excise duty in retail selling
June 2015

October 2015

February 2016

June 2016

October 2016

February 2017

June 2017

October 2017

February 2018

June 2018

October 2018

February 2019

June 2019

October 2019

February 2020

June 2020
price, and (iii) percentage share of VAT
in retail selling price. The time profiles
Source: Petroleum Planning and Analysis Cell (PPAC), Ministry of Petroleum and Natural Gas, GoI.
for petrol and diesel are broadly compa-
Figure 8: Trend in Share of Excise Duty and VAT in Retail Selling Diesel in Mumbai rable. There are, however, clear differ-
50 ences between the relative positions of
Indian crude basket (`/ltr)
Share of VAT in RSP
centre and states in the cases of Delhi
40 and Mumbai. This is due to differences
Share of excise duty in RSP
30 in the VAT rates that were applicable in
Delhi vis-à-vis Mumbai. It is noticeable
20 that while the percentage share of state
VAT remained relatively static through-
10
out the respective periods under consid-
0 eration, the percentage share of centre’s
June 2017

August 2017

October 2017

December 2017

February 2018

April 2018

June 2018

August 2018

October 2018

December 2018

February 2019

April 2019

June 2019

August 2019

October 2019

December 2019

February 2020

April 2020

June 2020

excise duty was variable. In the case of

Delhi, with respect to diesel, there were
two peaks for the share of excise duty.
Source: Petroleum Planning and Analysis Cell (PPAC), Ministry of Petroleum and Natural Gas, GoI. One occurred in March 2016 and the
Figure 9: Trend in Share of Excise Duty and VAT in Retail Selling Petrol in Mumbai latter occurred in May 2020. In both
50 cases, the Indian crude basket price was
Indian crude basket (`/ltr) Share of VAT in RSP
40
at a significantly low level reflecting
Share of excise duty in RSP weak global crude prices. This indicates
30 that the centre has been inclined towards
taking advantage of lower global crude
20
prices by increasing its excise duty rates.
10 It is only in the more recent periods that
a state/union territory like Delhi also
0 uplifted their VAT rate for diesel. It did not
June 2017

August 2017

October 2017

December 2017

February 2018

April 2018

June 2018

August 2018

October 2018

December 2018

February 2019

April 2019

June 2019

August 2019

October 2019

December 2019

February 2020

April 2020

June 2020

increase the VAT rate on petrol by as much.

In the case of Mumbai, as shown in
Figures 8 and 9, the patterns are somewhat
Source: Petroleum Planning and Analysis Cell (PPAC), Ministry of Petroleum and Natural Gas, GoI. different. In the case of diesel, both the
Economic & Political Weekly EPW february 27, 2021 vol lVi no 9 77
NOTES

centre and the state started with relative- components of centre’s excise duty, namely, duty rate by lowering the shareable
ly high shares of taxes on diesel when the one that is shareable with states excise duty component. Subsequently,
the price of Indian crude basket was rel- and the other that is not shareable. The as global crude prices fell, starting
atively low. Both of them brought the tax non-shareable component of the excise November 2014, the centre gradually
incidence down as the price of Indian duty comprises additional excise dutys increased the overall excise duty rate by
crude basket increased. The share of cen- and the SAED, while the basic excise duty mainly increasing the shareable compo-
tre’s excise duty was higher than that of constitutes the shareable component. nent, whose share increased to a peak of
the state VAT largely throughout the period Trends in these components highlight 44.1% in February 2016 and remained at
except for a range of months between Sep- changes in centre’s excise policy during that level until June 2017. From a peak of
tember 2018 to November 2018 when the recent years. It can be seen that during `21/ltr in June 2017, the overall excise
they were roughly equal. But the share the period April 2011–August 2012, the duty was brought down to `18.5/ltr in
of excise duty leaped up in recent overall excise duty rate on unbranded October 2018, a reduction of `3.5/ltr.
months whereas there was a much milder petrol was kept stable at a level of `14.8/ This was achieved by (i) lowering the
increase in the state VAT. This recent pat- ltr, of which the shareable component shareable component by `6.5/ltr and si-
tern is roughly the same for petrol. constituted approximately 43%. In Octo- multaneously, (ii) increasing the non-
Table 4 depicts the trend of excise ber 2012, owing to high global crude pric- shareable component by `3/ltr. This was
duty levied by the central government es and consequent pressure on inflation, reflected in a sharp fall in the proportion
on petrol and diesel. It shows two the centre reduced the overall excise of the shareable component to 16.7% by
October 2018. Similar trends can be ob-
Table 4: Trends in Central Excise Duty on Petrol and Diesel as Divided between Shareable and
Non-shareable Components served in the case of unbranded diesel. In
Date of Revision Unbranded Petrol Unbranded Diesel 2019–20, the overall excise duty rate
Basic Excise Other Duties Total Share of Basic Other Duties Total Share of
Duty Not-shareable Excise Non-shareable Excise Not-shareable Excise Non-sharable
was increased by `5/ltr for both petrol
(Shareable) with States Duties Excise Duties Duty with States Duties Excise Duties and diesel solely on account of an in-
`/ltr % `/ltr %
crease in the non-shareable component.
1 April 2011 6.35 8.43 14.78 57.0 2.60 2.14 4.74 45.1
The centre sharply increased the non-
25 June 2011 6.35 8.43 14.78 57.0 2.00 2.12 4.12 51.5
shareable component of the excise duty
14 September 2012 1.20 8.28 9.48 87.3 1.46 2.10 3.56 59.0
on unbranded petrol further from `20/
12 November 2014 2.70 8.32 11.02 75.5 2.96 2.15 5.11 42.1
2 December 2014 4.95 8.39 13.34 62.9 3.96 2.18 6.14 35.5
ltr in March 2020 to `30/ltr in May 2020
2 January 2015 6.95 8.45 15.40 54.9 5.96 2.24 8.20 27.3 taking the overall excise duty rate to
16 January 2015 8.95 8.51 17.46 48.7 7.96 2.30 10.26 22.4 `33/ltr. It is notable that the shareable
1 March 2015 5.46 12.00 17.46 68.7 4.26 6.00 10.26 58.5 component of excise duty has been
7 November 2015 7.06 12.00 19.06 63.0 4.66 6.00 10.66 56.3 maintained at a subdued level of `3/ltr
17 December 2015 7.36 12.00 19.36 62.0 5.83 6.00 11.83 50.7 since October 2018 while the non-share-
1 January 2016 7.73 12.00 19.73 60.8 7.83 6.00 13.83 43.4 able component has been increased by
31 January 2016 9.48 12.00 21.48 55.9 11.33 6.00 17.33 34.6 `15/ltr over the same period.
30 June 2017 8.48 12.00 20.48 58.6 10.33 6.00 16.33 36.7
3 October 2017 6.48 13.00 19.48 66.7 8.33 7.00 15.33 45.7 Oil Prices: Macroeconomic Impacts
2 February 2018 4.48 15.00 19.48 77.0 6.33 9.00 15.33 58.7
Influence of global crude prices on the
5 October 2018 2.98 15.00 17.98 83.4 4.83 9.00 13.83 65.1
Indian economy is transmitted through
6 July 2019 2.98 17.00 19.98 85.1 4.83 11.00 15.83 69.5
a high import bill and an increase in the
13 March 2020 2.98 20.00 22.98 87.0 4.83 14.00 18.83 74.3
cost of production of all goods and
5 May 2020 2.98 30.00 32.98 91.0 4.83 27.00 31.83 84.8
Source: CBIC, various notifications, Ministry of Finance, GoI. services where PoL products are used
as inputs. Growth, inflation, current
Table 5: Estimates of Impact of a $10/barrel Rise in Crude Price on the Indian Economy
account balance (CAB) and fiscal deficit
# Affected Parameter RBI (2019) RBI (2017)* Economic Survey SBI** Nomura
(2017–18) LiveMint (2017) are adversely affected by increasing
1 GDP Growth 0.15% points 0.2%–0.3% 0.16% points global crude prices. Table 5 gives some
((-) impact) points estimates of an impact of a $10/barrel
2 Inflation CPI: 0.49% points CPI: WPI: CPI: CPI:
increase in global crude prices on India’s
(+ impact) (at $65/bbl); 0.30% points 1.7% points 0.3% points 0.6%–0.7%
0.58% points points macroeconomic parameters like GDP
(at $55/bbl) growth, inflation, CAB, and fiscal deficit.
3 CAB 0.43% points $9 billion– 0.27% points 0.4% points A recent analysis (Ghosh and Tomar
((-) impact) $10 billion
2019) assesses the quantitative impact
4 Fiscal Balance 0.43% points 0.08% points 0.1% points
((-) impact) of a crude price shock on India’s three
* Monetary Policy Report, October 2017. major macro-stability indicators, namely
** Oil on boil: It’s time we understand oilnomics better, SBI Ecowrap, Issue No 12, FY19 dated 21 May 2018.
Source: Mint street memo no.17, “The Impact of Crude Price Shock on India’s Current Account Deficit, Inflation, and Fiscal
current account deficit (CAD), inflation,
Deficit,” RBI (January 2019). and fiscal deficit. The study finds that every
78 february 27, 2021 vol lVi no 9 EPW Economic & Political Weekly
 NOTES

$10/barrel increase in global crude price change in pump prices, that is, what the and diesel are significantly higher as
increases India’s CAD to GDP ratio by 43 final consumers pay. Therefore, it is compared to their levels in the corre-
basis points. important to differentiate between the sponding period last year. Already the
A rise in global crude prices increases static and dynamic components of pump overall CPI-based inflation has crossed 6%
the domestic price of crude products lead- prices. Some components of pump prices in June 2020, breaching the tolerance limit
ing to an increase in domestic inflation. do not change with change in prices defined in the monetary policy framework.
This impact on consumer price index (CPI) charged by the OMCs and are static over Specifically, CPI inflation in transportation
comes from two channels, namely direct time (for example, dealer commission). and communication services is at 7.1%
and indirect. The direct channel is where After correcting for these static compo- in June 2020. Petrol and diesel used for
crude products themselves appear as nents, the pass-through of international transportation constitute 27.2% of the
constituents in the CPI. In the short run, crude prices into pump prices is only group of transportation and communica-
a change in prices of crude products af- partial, estimated at around 66% by the tion services. These provide a cost-push
fects the CPI directly due to their weighted authors. The study reported inflation re- factor to the overall CPI inflation rate.
contribution in the index. The CPI cate- sults for both 100% and 66% pass-
gories which contain crude products as through. These are shown in Table 6. Taxes on POL Products
constituents are (i) transport (petrol The impact of an increase in crude prices Table 7 provides a cross-country com-
and diesel), (ii) fuel and light (fuel oth- on fiscal deficit depends on several factors parison indicating the relative share of
ers), and (iii) fuel and light (kerosene, that include (i) pass-through of interna- petroleum taxes in the retail selling price
LPG). Together these three categories have tional prices to pump prices, (ii) excise and of petrol and diesel for selected coun-
a weight of 4.4% in the overall CPI. customs duty, and (iii) petroleum subsidy tries. These data pertain to the month of
The indirect effect occurs when there by the central government. The study March 2020, except for India where it
is an increase in the retail prices of all finds that an increase of $10/bbl in global pertains to the month of May 2020. In
other commodities manufactured using crude prices would increase the fiscal defi- March 2020, India was somewhere in
crude as an input due to a crude price cit by 43 basis points, if the government the middle. However, since then the share
shock. The net impact of the crude price decides to absorb the entire oil price shock of petroleum taxes has increased consid-
increase on inflation is thus given by the rather than passing it to the end users. erably in India, particularly in recent
sum of both direct and indirect effects. It is notable that in the current scenario, months. According to our estimate, the
A given change in international crude although global crude oil prices have share of petroleum taxes in India in the
price does not lead to an equal percentage dipped, the retail selling prices of petrol case of petrol and diesel accounted for
71.3% and 69.8% respectively in May
Table 6: Direct and Indirect Impact of Crude Prices (in bps)
CPI Initial Price=$55/barrel Initial Price=$65/barrel 2020. These rates indicate the average
Weight Direct Indirect Total Direct Indirect Total share for the month in Delhi which is
Pass-through assumption of pump price to international crude= 66% (controlling for cess) taken as representative of the Indian sit-
CPl (transport) 2.4 28 30 58 24 26 49
uation. This takes India to the top of the
CPI (transport + others) 2.5 30 30 60 26 26 51
list of major economies with respect to
CPI (trans + others + LPG + kerosene) 4.4 52 30 82 44 26 70
Pass-through assumption of pump price to international crude= 100% (Ignoring cess)
the taxation of selected PoL products.
CPl (transport) 2.4 43 46 89 36 39 75
CPl (transport + others) 2.5 46 46 92 39 39 78 Conclusions
CPI (trans + others + LPG + kerosene) 4.4 79 46 125 67 39 106 In the context of the ongoing pandemic,
Kerosene and LPG are currently subsidised and may not see full pass-through of international prices. one development that has favoured
Source: RBI (2019).
India relates to the low level of global
Table 7: Cross-country Comparison of Price and Tax in Indian Rupees (` per litre)
Country Petrol Diesel crude prices. The expectation was that
Retail Selling Ex-tax Taxes % of Taxes Retail Selling Ex-tax Taxes % of Taxes this would benefit the users of PoL
Price Price in RSP Price Price in RSP
products, particularly in the industry
India* 75.2 21.6 53.6 71.31 68.5 20.6 47.8 69.84
and transport sectors and the consumers.
Italy 123.1 41.1 82 66.60 114.1 42.9 71.3 62.50
France 114.8 38.9 75.9 66.10 107.6 39.7 67.9 63.10
This expectation has so far been belied
Germany 107.5 36.5 71 66.00 94.6 40.8 53.7 56.80 as the available space between the input
UK 109.7 38.2 71.6 65.20 113.7 41.6 72.1 63.40 price of crude and the retail price of PoL
Spain 100.7 44.3 56.3 55.90 92.6 45.3 47.2 51.00 products has been used up by the central
Japan 98.8 52.2 46.6 47.10 85.4 56.5 28.9 33.80 and state governments by hiking up the tax
Canada 49.8 28.3 21.5 43.10 57.8 38.3 19.5 33.70 rates on PoL products under their respec-
US 43.9 34.4 9.4 21.50 53.6 42.6 11 20.50 tive control. The central government has
(1) Prices in $ per litre for the month of March 2020 for France, Germany, Italy, Spain, United Kingdom, Japan, Canada and
United States are sourced from IEA (2020). pre-emptively used the available reve-
(2) Average exchange rate of ` 74.4/$ (March 2020) has been used to convert the retail selling prices in $ to `. nue space in a manner such that its share
(3) VAT is excluded from prices for automotive diesel for France, Italy, Spain and UK as it is refunded to industry.
(4) * Prices in India are for May 2020 (based on retail selling [RSP] in Delhi). in the retail prices has increased consid-
Source: PPAC, IEA. erably over time. Only recently, states
Economic & Political Weekly EPW february 27, 2021 vol lVi no 9 79
NOTES
could also hike up the relevant VAT rates
marginally. As a result, instead of retail
prices coming down as the crude prices
came down, these have gone up to sig-
nificantly high levels. The main reason
for these trends pertains to the highly
constrained fiscal space of both the
central and state governments at a time
precisely when they need to provide
strong fiscal stimuli to cope with the
pandemic’s economic fallout. It is also
clear that with such a heavy dependence
of the central and state governments on
revenues from petroleum taxes, it would
be difficult to persuade them to make
the PoL products that have remained
outside GST as part of the GST regime.
Since retail prices of PoL products have a
potential inflationary impact through
transport and energy costs, this matter
needs to be carefully monitored as the
fiscal year progresses.
notes
1 Clause 110 of the Finance Bill 2018 provides
that the government will levy an additional duty
of excise to be called the Road and Infrastruc-
ture Cess on the goods mentioned in the sched-
ule 6 (motor spirit and high speed diesel oil)
Module on Educational Statistics
The EPWRF ITS has 21 modules covering a range of macro-economic, financial and social sector indicators on the Indian economy
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80
being the goods manufactured or produced at
`8 per litre for the purpose of financing infra-
structure projects. The cess leviable shall be in
addition to any other duties of excise charge-
able on such goods under the Central Excise
Act, 1944 or any other law for the time being in
force. With this amendment, the erstwhile
Road Cess (additional excise duty) was replaced
by the Road and Infrastructure Cess (addition-
al excise duty), https://www.cbic.gov.in/re-
sources/htdocs-cbec/ub1819/finbill2018.pdf.
2 Central taxes include basic excise duty, special
additional excise duty, and road and infra-
structure cess on excise duty. It excludes cus-
toms duty, cess on crude oil, service tax levied
prior to GST, and CGST and IGST.
3 State taxes include only state VAT levied on
petroleum, oil and lubricants (POL) products
but excludes entry tax, octroy and electricity
duty paid on inputs.
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Features
Presents all-India
and state-wise
annual data from
1981 onwards.
Structured in three
sections :
• Literacy in India
• School Education
• Higher Education
Includes data on
SC/ST students and
school education in
rural areas.
vol lVi no 9 EPW Economic & Political Weekly