High petroleum prices make for good policy

The last few weeks have seen an interesting trajectory since 2014. While the current government has been fortunate to see a drastic reduction of crude oil prices, they have played a fiscally safe policy of not reducing the oil prices proportionately. This has resulted in more-or-less similarly priced petrol and diesel, despite the drop in crude prices.

 As on September 18, the international crude price for the Indian basket was around $55. This is a far cry from the peaks of $136 seen under the UPA government. However, the concept of pricing petroleum products high is not only prudent, but is also environmentally friendly. There are several countries in the world that price fuel higher than India, with the intent of discouraging fossil fuel consumption and promoting clean fuels. It may be noted that the period of high crude prices (2008 to 2013) greatly coincided with massive innovations in the clean energy space internationally, and an unprecedented capacity addition of wind and solar across major economies like USA, China and Germany.

Despite this background, Petroleum Minister Dharmendra Pradhan is hard pressed to explain the high prices of petrol and diesel. It is generally expected that the high prices of petrol and diesel affect the middle class, and the minister now has to explain why the government is crucial segment. He has been tweeting that an inclusion of petroleum products in GST regime could go a long way in reducing the price of petrol and diesel. Further, it is expected that oil refiners and marketers such as IOC, HPCL and BPCL are expected to bear a loss of about Rs. 5000 crore in this financial year alone on account of this exclusion.

In the end, the important realisation is that there is a cost build-up for petrol and diesel that basically translates into taxes. For instance, the price of petrol in Delhi, Rs. 70.4, includes taxes of over Rs. 36.5, or about 52%. Thus, this increased price translates to more money in the hands of the government, and can potentially translate into increased spending in socially important areas such as education and health. It also translates to limited use of petrol and diesel, and could potentially increase the usage of renewable energy and other environmentally sources of fuels. However, explaining complex policies to a common man has never been easy.

In the end game, it is important for the government to maintain this high pricing for a host of benefits. Inclusion of petroleum products in GST may be a good way to pass the buck to the GST council, but high petrol prices are a rare glimmer of good policy in this government and this needs to be applauded and supported.