Cutting levy on petroleum products by Centre too little, too late; set to hit year’s economic growth prospect

The big surge in global oil prices, especially through the second half of the current year, has been a big cause of concern for large oil importers across the world, including India. This comes at a time when the world is preparing itself to restore economic growth after its massive decline in 2020 due to the coronavirus pandemic.

Unfortunately, India, which is 85 percent import dependent on oil, has become the worst sufferer. The pandemic had badly compressed India’s economy in 2020. The country’s GDP contracted substantially. In 2020-21, India’s GDP shrank 7.3 per cent to Rs.135.13 trillion from Rs.145.69 trillion in 2019-20.

During this fiscal, economists expected the country’s GDP would improve to a level higher than 2019-20 GDP. But it now appears that this is practically impossible to achieve. High domestic oil and petroleum products prices, compounded by hefty government levies, are impacting the country’s economic growth despite the signs of a strong demand surge across industry. The current high oil prices will also affect the global economic growth, which lost 4.5 per cent in 2020.

However, the economy of the US and China will be much less affected by the current oil price surge as the world’s top two oil importing countries are also major exporters of oil. Since 2019, the US has surpassed Saudi Arabia as the world’s number one oil exporter, largely due to its big output of shale oil. China, the world’s second biggest oil importer, was the fifth largest oil exporter in 2020. China exported an average 4.93 million barrels per day, last year.

The biggest benefactors of currently high oil prices are: the US, Saudi Arabia, Russia, China, Canada, Iraq, the UAE, Brazil, Iran and Kuwait. The economies of India, Japan, South Korea, Germany, Italy, Spain, France and the Netherlands are to be among the worst hit. All those eight countries import at the rate of over one million barrels per day, including crude oil and oil products, noted the CIA World Factbook as of January 1. 2020.

India’s oil import, the world’s third largest after the US and China, was over four million barrels per day. Its oil import through the current year showed a steady growth till last month.

How far could the global oil price go this year? Goldman Sachs has forecast that year-end Brent oil prices will go up to $90 per barrel from $80. The FT put the 52-week price range at $35.74-$86.70 per barrel. Brent futures hit a near three-year high last month as global output disruptions forced energy companies to pull large amounts of crude oil out of inventories.

The Paris-based International Energy Agency has revised up global oil demand forecasts for 2021 and 2022. According to IEA, global oil demand is set to rise by 5.5 million barrels per day (mb/d) in 2021 and 3.3 mb/d in 2022. Global oil demand is expected to reach 96.3 mb/d in 2021 and 99.6 mb/d in 2022.

For the current month of November, the Organisation of the Petroleum Exporting Countries Plus (OPEC+) is said to be ready to boost output by 400,000 barrels per day. The IEA has warned that higher energy prices could lead to lower industrial activity and slowdown in economic recovery.

Last month, petrol and diesel prices across India soared to all-time high levels as rates were hiked again and again ostensibly to keep pace with international oil price spurt. In October, the petrol price in Balaghat, which shares borders with Chhattisgarh and Maharashtra, reached Rs. 120 per litre.

In reality, these price hikes were as much linked with high domestic levies as high international prices. While consumers in India suffered, the government pocketed windfall tax gains. Nearly two-third of the price of petrol paid by Indian consumers goes to the Central and state governments as levies.

Incidentally, current world oil prices are still far below their alarming levels in the past. Historically, crude oil price reached an all time high of $147.27 in July 2008. At that time, the price was boosted by global supply worries, growing tensions over Iran and the weak US currency.

And back then, the price of petrol in India was only Rs. 50.62 per litre and diesel Rs.34.86 per litre.

Thus, the government’s routine explanation that the current high retail oil prices in India are entirely linked with the global prices is not quite acceptable.

Incidentally, there have been several oil shocks in the world both for consumers and producers since 1973 when the powerful Arab members of the Organisation of Petrol Exporting Countries (OPEC) decided to suddenly quadruple the price of oil to almost $12 a barrel. But none has hit the industry and ordinary consumers with such a ferocity as it is being witnessed by the pandemic-hit world economy today.

In April 2020, oil prices plummeted to as low as $9.12 per barrel. Two top oil producers — Saudi Arabia and Russia — resorted to a price war flooding the market with cheap oil against the backdrop of falling global demand. Can anyone really explain why in India petrol and diesel prices were substantially hiked in April, 2020?

For example, the petrol prices then in Mumbai and Kolkata were Rs 76.31 and 73.30 per litre, respectively. The diesel in Mumbai cost Rs.66.21 per litre and in Kolkata Rs. 65.62.

Similarly, the oil price collapse of 1986 to $10 per barrel, which was considered to be a major reason behind the eventual dissolution of the Soviet Union in 1991, had little impact on India’s government-controlled oil prices.

Nobody can deny the government’s role in the worst-ever oil price shock in India this year. Last week, though the Union government reduced excise duty on diesel by Rs.10 and petrol by Rs.5 per litre to provide relief to consumers, it was too little and came too late. The move is interpreted as more political than economic as the ruling BJP at the Centre will soon face election in certain states.

But petrol prices in most parts of India are still above Rs.100 per litre. Such high energy costs are bound to affect the current year’s buoyant economic growth prospect.

(IPA Service)

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