Biggest cut in oil prices since 1991

Global oil prices see the biggest cut since the 1991 Gulf War

  • 12th Mar 2020

The crude oil prices have dropped in the sharpest cut since the 1991 Gulf War this week. This means that in times of economic slowdown, India can significantly reduce its import bill and the Modi government can save money that may be used to reverse the economic slowdown.

The oil import bill is the single-biggest entry in the current account to cause deficit year after year. India imports nearly 85 percent of its oil requirements. And, oil is a major source of energy and a lot depends on how India spends its oil as it plans economic recovery.

Oil prices have crashed by about 50 percent since mid-January. Before the current slide began, crude oil was selling at $59 per barrel on February 20-21. It crashed to less than $34 per barrel on March 11.

But if you thought that your vehicular fuel bill will decline then you may be mistaken. Even though the current market prices show a declining trend with diesel available at 13-month low and petrol at the cheapest since July 2019.

However, there is a precedence to take note of. The oil markets had welcomed the Modi government in 2014 with a major price fall. The prices were unusually low between 2014 and 2016. But the Modi government used the opportunity to fatten its purse rather than passing on the benefit to the direct consumers.

The Modi government went on a duty-increase spree to keep pace with the declining crude oil prices during the period. The government raised excise duties on petrol and diesel to collect more tax.

Petroleum continues to stay outside the ambit of the goods and services tax (GST), the rationalized indirect tax regime introduced in 2017. During the period of declining crude oil prices, the Modi government -- between November 2014 and January 2016 to be precise -- had raised excise duty nine times. The excise duty was slashed just once, in October 2018.

This way, the central government mopped up over Rs 10 lakh crore from taxes on fuel between 2014-15 and 2018-19. State governments too benefitted from these hikes in taxation. States saw their value-added tax (VAT) revenue (as it is outside GST) rise from Rs 1.3 lakh crore in 2014-15 to Rs 1.8 lakh crore in 2017-18.

As if on the cue, the Karnataka government last week hiked tax on petrol from 32 percent to 35 and on diesel from 21 percent to 24 percent.

For consumers, keeping petrol and diesel outside GST coverage means they pay about 50 percent of the total fuel cost as taxes. The central government levies Rs 19.98 per excise duty on one liter of petrol and Rs 15.83 per on one liter of diesel. Different states levy varying rates of VAT. This ranges from 6 percent to 39 percent.

At 4.7 percent GDP growth rate recorded during the last quarter, India has extended run of the economic slowdown. The pandemic proportion acquired by the coronavirus infection means the economic activities are further hit adversely. The global supply chain stands broken. India, like any other major open economy, depends heavily on the global supply chain to sustain the pace of economic growth.

Economists and planners have been emphasizing that the Indian economy needs a major boost of investment to bring India back on a fast economic growth trajectory. The private investment has been sluggish for far too long. The Modi government has found its hands tied as it saw revenue generation falling behind targets in the last financial year that is closing in three weeks.

Less revenue on hand means the Modi government cannot invest in the quantum that is required to jumpstart the country's economy. Consumption has been low, particularly in the villages. This can be revived with the government pushing money into villages through programs like MNREGA and other social security schemes.

The crash in crude oil prices could not have come at a more opportune time for the Modi government. Coronavirus has forced it to put India practically into a quarantine. And, in these times, it has got the chance to save money on oil import and earn big at the same time by keeping the petrol-diesel prices at a pre-crash level.

However, there is a concern that hiking duty on petrol and diesel may push inflation. The government may calculate as to how much more inflation it wants and how much more revenue it wants to generate from the current oil price fall.

There are two more things to consider -- the price of crude oil in the Indian basket and the health of rupee. What is certain is that anticipating a dramatic decline in petrol and oil prices is like expecting too much from the government, in reality, and the oil companies, technically.

To know more visit:
https://www.indiatoday.in/news-analysis/story/biggest-cut-in-oil-prices-since-1991-will-your-fuel-bill-crash-1654805-2020-03-12

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