India: The Case of Skyrocketing Fuel Price, Green Tax, and CNG
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India: The Case of Skyrocketing Fuel Price, Green Tax, and CNG

With petrol and diesel-like fuel prices skyrocketing every day, and the related pollution issues, are CNG or auto LPG the solution? Does the proposed green tax further indicate that?

By Shreyasi Dey
AutoFinTechs.com

India: The Case of Skyrocketing Fuel Price, Green Tax, and CNG

The sky is the limit…


Is this the new inspiration for the oil companies in India? Well, it seems so. At least if we look at the current pace of fuel price hike, then definitely. The way petrol and diesel prices are hitting new highs every day, it seems the oil marketing companies have set their goals high and will not stop until they get there.


In Mumbai, on Friday, 5th February 2021, petrol price was at an all-time high of Rs 93.49 per litre, while diesel was Rs 83.99 a litre. Not very far from the three-figure milestone. Not only Mumbai, in other cities as well, but the pricing of both the auto fuels are also on fire and burning the customers’ pockets.


Petrol prices per litre in Delhi, Kolkata, and Chennai on Friday were Rs 86.65, Rs 88.01, and Rs 89.13 respectively. On the other hand, diesel prices per litre in these same cities on the same day were Rs 77.13, Rs 80.71, and Rs 82.33 respectively.


Both the petrol and diesel prices are running wild and upward of course. The rates are revised across the country on a daily basis at 6 am every day, since June 2017, under the dynamic fuel price method, which keeps the domestic fuel price changing in sync with the global crude oil price. Also, under this dynamic fuel price regime, the Indian government has permitted the oil marketing companies to determine the retail price of the fuels on the currency exchange rate and fluctuations in the international market.


So far, there are various impacting factors that play roles behind the surge or reduction in fuel rates in India. These include exchange rate between Rupee and US Dollar, cost of crude oil, global cues, demand for fuel, etc. The variations of the fuel prices in different cities are the results of variable value-added tax (VAT) rates in different states.


Taxing components


The fuel price includes excise duty, VAT, and dealer commissions. With all this as add on to the actual price, the retail price of petrol or diesel gets nearly doubled. To put it simply, if you are paying an amount of Rs 93.49 for one litre of petrol in Mumbai, the actual amount minus all the taxes and cess is around Rs 46.74. Now multiply the amount of tax you are paying to fill up a full tank of your motorcycle or car.


According to India’s third-largest fuel oil marketing company (OMC) Hindustan Petroleum Corporation Ltd (HPCL), the retail prices of both petrol and diesel are the result of the addition of central and state taxes along with dealer commission to the benchmark cost of production. However, as the fuel retailer giant claims, only 25-30% of the retail pump rates are dependent on international benchmark cost and the rest are central and state taxes.


The OMCs claim that such a high price can be majorly blamed for the high rate of tax imposed by the governments. The cracks or margins are low and the government could have the best answer to how price hikes can be paused, claims an HPCL official.


Earlier this week, Oil Minister Dharmendra Pradhan told the Rajya Sabha in a written reply to a question that excise duty levied by the Central government makes up for Rs 32.98 per litre of the petrol price in Delhi, and VAT of the state government constitutes Rs 19.55. For diesel, the central excise adds up to Rs 31.83 and VAT to Rs 10.99. Besides that, the end price also includes a minimum dealer commission of Rs 2.6 per litre on petrol and Rs 2 on diesel.


The Indian government is expected to earn incremental revenue of Rs 1.4 lakh crore because of higher excise duty in FY21, despite petrol and diesel sales volume declining by around 10-16%.


Growing numbers


Previously, the fuel rate used to be revised every fortnight. But, since the dynamic fuel price regime has been incorporated, the pricing changes daily. While implementing the regime, the government claimed it would bring transparency and reduce the burden from consumers as in case of price increase, it will rise gradually. Like many consumer products, the pricing of fuels since then (June 2017), has only gone higher and higher, leave alone only a few times of reduction.


In the past 30 days, petrol and diesel-like conventional fuel prices in Mumbai have increased by Rs 2.66 and Rs 2.92 respectively. Also, in the last 10 months, the petrol pricing has increased by over 24% in the business capital of the country, while diesel, which is more popularly known as common man’s fuel, witnessed a 28% plus hike. The other metros too aren’t very far behind in terms of this hike.


At the start of the current financial year (FY20-21), the price difference between petrol and diesel was Rs 10.09 per litre and today it came down to less than Rs 9.53 a litre. This indicates how the price of diesel, known as common man’s fuel has increased.


Such rapid hikes in both the auto fuel prices are directly impacting not only the Indian motorists but citizens at large. While the motorists are paying a hefty amount for fuel bills, the increased transportation cost is impacting the price of daily consumables, increasing people’s monthly expenditure.


Take the case of the motorists for example. At the beginning of FY21, a Hero Splendor commuter motorcycle owner was paying Rs 828 for the full tank of petrol. Now, he is paying Rs 1,025.49, around Rs 200 extra for the same amount of fuel. On the other hand, small car owners are shelling out more than Rs 500 extra for a full tank of petrol, while the mid-size SUV owners are paying around Rs 1,000 more for a full tank for diesel, as compared to what they used to spend at the start of this financial year.


Crude burden


The rise in global crude oil prices is a major reason behind the hikes in fuel prices in India. As the countries around the world are gradually returning to their normal economic operations after the Covid-19 pandemic induced lockdowns resulted in a halt or near halt to all the activities, the crude oil price is rising again after hitting a historic low last year. On Friday, Brent crude oil was $58.39 per barrel, while on Thursday; it was $57.46 a barrel. This is up by around 200% as compared to $18.38 per barrel pricing registered on 1st April 2020.


According to HPCL, there has been a sudden spike in international oil prices in the last 2-3 days because of a perception of mismatch in demand and supply as well due to the production cut by Saudi Arabia.


Budget 2021 shows a solution


In her Union Budget 2021 speech, Finance Minister Nirmala Sitharaman said that around 100 more districts across India will connect with the City Gas Distribution (CGD) network in the next three years.


Talking about the steps towards renewable and greener energy solutions, Suyash Gupta, Director General, Indian Auto LPG Coalition, said that the budget focused on energy transition and renewable energy. “A notable announcement in this regard has been the announcement of the Hydrogen Energy Mission for generating hydrogen from green power sources. Similarly, the budget furthers the government’s longstanding commitment to non-conventional energy with a capital infusion of Rs 1,000 crores to the Solar Energy Corporation of India and Rs 1,500 crores to the Indian Renewable Energy Development Agency. The Finance Minister also announced the extension of the city gas distribution project to 100 additional districts,” said Gupta.


He also added that the Auto LPG and CNG sector stakeholders in India hope the city gas project is diversified to include Auto LPG in its ambit along with CNG which is the current focus. “Despite being one of the cleanest and most easily available gas, Auto LPG remains highly under-utilized in India’s transport sector. The inclusion of autogas in the city gas distribution project will not only allow a wider choice for consumers but will also be a major boost to efforts to clean up the environment. We absolutely need a low-hanging fruit like Auto LPG, which can be implemented immediately, added Gupta.


Out of the world’s top 20 most polluted cities, 14 are in India, and the vehicular emission, especially the deadly gases emitted by diesel vehicles are responsible for around 66% of air pollution-related deaths in India. According to a study, back in 2015, in India, 74,000 deaths occurred due to outdoor pollution, with a significant chunk of it attributed to vehicular emission.


CNG and LPG are respites


Compressed Natural Gas (CNG) is a part of the CGD setup and it is dispensed through the fuel stations for automobile usage. While the government has been promoting the CNG and LPG usage for automobiles, the total number of CNG refueling stations was 2,543 across the country in November 2020, which is a lesser number than required.


Also, there is a significant geographical disparity in the CNG network layout. Nearly 76% of total CNG refueling stations in India are concentrated in Delhi, Gujarat (Dadra, Nagar Haveli, Daman, and Diu), Uttar Pradesh, and Maharashtra. The CNG refueling stations are majorly concentrated in the cities, while the lion’s share of the highways lies through the rural areas of the country. Such an uneven distribution of CNG stations has prevented the adoption of this greener and cheaper fuel in most parts of India.


CNG is around 60% cheaper than petrol and 45% cheaper than diesel. CNG increases per kilometre fuel efficiency of a vehicle. 1 kg of CNG can ensure 40% more range than what 1 litre of petrol does. Hence, CNG definitely increases the mileage of the vehicle and is also cheaper than petrol so the owner doesn’t have to bear the heavy expenses. If a vehicle daily runs around 70-80 km, which is quite common nowadays, then CNG is a perfect fuel option for that considering the economic effects.'


Due to the high volatility in conventional fuel prices, many vehicle owners are shifting their focus to CNG. While several buyers are opting for CNG variants of vehicles, the existing owners are installing aftermarket CNG kits on their vehicles, in a smaller number albeit. It is fast gaining prominence as a preferred fuel option, especially when it comes to public transportation vehicles. Several major cities such as Delhi, Noida, Gurgaon, etc are using CNG-powered buses for the city’s public transportation system.


Will Green Cess boost CNG usage?


Minister of Road, Transport and Highways, Nitin Gadkari has proposed the imposition of a green tax on a certain category of vehicles from 1st April 2022. As per this proposal, the green tax will be levied on personal vehicles during the time of renewal of registration certificate after 15 years, which will be equivalent to 10-25% of the road tax of a petrol or diesel vehicle depending on the fuel. A similar tax could be levied on transport or commercial vehicles that are older than 8 years during the time of renewal of fitness certificate.


However, hybrid and pure electric vehicles along with those running on cleaner alternative fuels such as CNG, Liquefied Petroleum Gas (LPG), Ethanol, etc will be exempted from this green tax. Slapping this new cess on petrol or diesel vehicles will result in higher prices for these models, which may see more customers, especially the small car and compact sedan buyers shifting to CNG.


With Maruti Suzuki and Hyundai having the lion’s share in the CNG-powered passenger vehicle segment of the Indian auto industry, these two OEMs will be most beneficial of the new tax regime. Not only the new vehicles powered by CNG or LPG, but the green tax will also likely boost the resale value of CNG vehicles. Apart from that, it would also help the aftermarket CNG kit sales to grow. Interestingly, many industry leaders have been advocating for greater usage of CNG and LPG instead of petrol and diesel. This would not reduce the air pollution, but reduce the pocket pinch of the vehicle owners as well.


A great growth opportunity for Maruti Suzuki


In February 2020, Maruti Suzuki announced its ‘Mission Green Million’ strategy to promote greener vehicles. Under this strategy, India’s largest automaker aims to sell 10 lakh green cars over the next few years. CNG is a key part of this strategy alongside hybrid and electric vehicles. In the FY21, Maruti Suzuki has sold 71,990 units of CNG passenger vehicles during the April-November period, registering a 31% growth from 55,071 units sold during the April-November FY20.


The majority of these sales were attributed to states like Delhi, Maharashtra, Uttar Pradesh, Haryana, and Gujarat, where the CNG refueling network is well established compared to other states of the country. With 14 passenger vehicles in its portfolio, Maruti Suzuki currently sells six cars with a bi-fuel petrol-CNG option. These are – Alto, S-Presso, Celerio, WagonR, Eeco, and Ertiga. These six models come equipped with the OEM’s factory-fitted S-CNG technology.


In an interview, Shashank Srivastava, Executive Director, Sales and Marketing, Maruti Suzuki, said that the converging fuel prices for petrol and diesel make no economic sense for the vehicle buyers to opt for diesel today. He also said that diesel sales in the passenger car segment are less than 2.5% in FY21, with only the SUVs showing some traction for the fuel. According to Srivastava, CNG vehicle sales have grown by 25% this year, even when the market is down by 60-70%.


Now, with such a track record, and the government planning expansion of the CNG network besides imposing a green tax on petrol and diesel cars, Maruti Suzuki could be the biggest beneficiary of the new regime, with its wide portfolio of CNG cars.


Bottomline


According to Crisil Research, in 2021, Brent crude is expected to rise by around 23% YoY to an average of $50-55 per barrel from $42.3 per barrel in 2020, riding on the gradual recovery in global economic activities. This translates into a 4% increase over the average closing price of December 2020.


In comparison, gas prices are expected to rise over 20% to $2.5-3.5 per million British thermal unit (mBbtu) in CY2021 from $2.45 in CY2020.


Within CGD, the CNG segment accounts for around 40%. As Crisil forecasts, the CGD demand is expected to log a 25% growth rate between FY2021 and FY2023. Now, with the green cess likely to be implemented, expect the CNG demand to grow at the same pace. Currently, CNG vehicles account for only 5% of India’s total passenger vehicle market. Around 1.8 lakh CNG-powered passenger vehicles were sold in FY20, as compared to 1.4 lakh units sold in FY2015.


Also, talking about the petrol or diesel in India, fuel prices have never been cheap, at least the one used in automobiles. However, the recent tax-driven price hikes are ruining the benefit of affordable mobility in the world’s largest small car market that also witnesses perhaps the highest demand for most fuel-efficient cars in the world. The government needs to understand the advantages of affordable fuel as India is far beyond and much more than just the metro cities. Letting loose the fuel prices like a wild beast on run will only be a self-destructive step.


Mobility is one segment that boosts the economy to grow through various channels. Hence, affordable fuel is a right in an emerging or developing economy like our country and should not be seen as an administrative concession.


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DISCLAIMER: The views expressed in this insight piece are those of the author and do not necessarily reflect the official policy or position of IndraStra Global.