Direction (Qs.1 to 8): Read the given passage carefully and answer the questions that follow. Certain words are given in bold to help you locate them while answering some of these.
The persisting upsurge of fuel prices across the country brings home the ruling government’s lackadaisical attitude towards the problems that commoners encounter due to the hikes. In the face of country-wide protests by the Opposition, the central government has shifted the onus of fuel price adjustment on to the state governments. Except for Rajasthan and Andhra Pradesh, which have announced price reductions of INR 2.5 and INR 2 per litre of fuel, respectively, no other state has responded yet. Even then, petrol prices in state capitals are hovering between INR 81–INR 83 and INR 85–INR 87 per litre, compared to nearly INR 90 per litre in Mumbai, which has the highest Value-Added Tax (VAT) on auto fuel.
Fuel price deregulations in 2010 and 2014 should have been meaningful had consumers been able to gain when global prices fell, just as they have to bear the brunt when the prices spike. But, the reality is otherwise. A back-of-the-envelope estimate is that with the addition of excise duty and VAT (nearly 50% of selling price) and dealer commission (at least 9% of the selling price), consumers end up paying double the price that upstream oil retailers charge from the dealers. While this huge burden of government taxes and duties makes consumers pay through the nose when global oil prices rise, it also prevents them from leveraging the benefits when prices are low.
It is unlikely that the government will be willing to sacrifice these easy revenues, especially in the wake of the 2019 general elections. On the one hand, with a depreciating rupee its oil import bills are burgeoning and, on the other, its tax revenues have not been settled fully as the Goods and Services Tax (GST) is still a work in progress. At this juncture slashing down duties/taxes will mean fiscal adjustments by foregoing some of its pet welfare schemes. Many of the Bharatiya Janata Party (BJP)-governed states, which have waived off farm loans as a populist policy, can barely reduce VAT as the waiver has to be supplanted by revenue from elsewhere.
In India, fuel is priced as if it, and not crude oil, is imported. Though, in reality, India is a net exporter of the fuel, with the export value (at INR 23, 858 million) in 2017–18 being almost 32 times the import value of the fuel (INR 744 million), thanks to the expansion in refinery capacity. But, premised on the misplaced assumption, the calculation of Refinery Gate Price (RGP) and, hence, losses/ profits of oil manufacturing companies/refiners assign higher weightage to the import parity price of fuel. This, in turn, implies that whenever international oil prices rise, the oil manufacturers in India make a windfall gain. Concurrently, consumers end up paying a very high price, equivalent to what they would have paid had India been importing fuel instead of crude oil. Thus, the notational losses (profits)—commonly known as “under (over) recovery”—are over (under) estimations of actual losses (profits); though frequently used interchangeably with the latter.
Fuel pricing in this country is more a political statement than an economic exercise. The National Democratic Alliance government, that had once assumed a business-friendly stance of deregulating diesel prices in 2014 just after coming to power, is now seeking windfall taxation on the oil producing companies’ profits, to keep its fiscal math right for the forthcoming elections. Any profit above $70 per barrel will be taxed; though it is not clear how the government has arrived at this benchmark figure. There is an emerging discontent within the petroleum industry that profit taxation will be prohibitive and will result in a squeeze on the capital investments (both domestic and foreign) much needed by the oil exploration industry. Trapped in this fuel fiasco, India reminds one of the pelicans caught in the Gulf oil spill.Question No : 1
According to the first paragraph, which of the following statements is not true?
(1) The state Value Added Tax is also added to the prices of fuel
(2) Rising fuel prices are stoking an inflationary fire, imposing an unbearable burden on the people.
(3) The prices of petrol and diesel touched a new high with Mumbai paying the maximum among the four metros.
(4) The reduction in fuel price in Andhra was announced a day after Rajasthan slashed VAT on fuel by four per cent and the prices of petrol and diesel in Rajasthan are down by Rs.2.5 per litre.
(5) Rajasthan and Andhra Pradesh have reduced state taxes on fuel.Question No : 2
Which of the following is neither an expectation nor an end result of fuel price deregulations in 2010 and 2014?
I. It allowed oil companies to decide on the prices of fuel, considering the change in international oil prices and currency exchange rate.
II. Deregulation of fuel prices meant consumers would pay the actual price of petrol or diesel with no cushion against global price spike and as a corollary, consumers were to gain if global oil prices fell.
III. For the consumer, this rejig didn’t mellow prices as with the addition of excise duty, VAT and dealer commission consumers end up paying double the price
IV. Deregulation of fuel prices should also lead to consumers benefiting from low global prices.
(1) Only I
(2) Both I and II
(3) Both I and IV
(4) I, III and IV
(5) I, II and IV
Question No : 3
In the question below is given a statement followed by two assumptions numbered I and II. An assumption is something supposed or taken for granted. You have to consider the statement and the following assumptions and then mark the correct answer.
Statement: Many of the Bharatiya Janata Party (BJP)-governed states, which have waived off farm loans as a populist policy, can barely reduce VAT as the waiver has to be supplanted by revenue from elsewhere.
Assumption I: While loan waivers are an easy way to win political support, they are not without negative consequences.
Assumption II: Several states have waived agricultural loans as part of their populist outreach to win over farmers in distress.
(1) Only assumption I is implicit.
(2) Only assumption II is implicit.
(3) Either assumption I or II is implicit.
(4) Neither assumption I nor II is implicit
(5) Both the assumptions I and II are implicitQuestion No : 4
Why it is unlikely that the government will sacrifice the easy revenues?
I. 2019 elections are approaching
II. The tax revenues have not been settled fully as the goods and services tax is still a work in progress
III. Burgeoning oil import bills could put further downward pressure on the rupee
IV. Slashing down duties/taxes will mean fiscal adjustments by foregoing some of its pet welfare schemes
(1) Both II and III
(2) I, II and III
(3) II, III and IV
(4) Both I and IV
(5) All of the above
Question No : 5
Which of the following statements can’t be deciphered from the fourth paragraph?
(1) India's export of petrol and diesel is more than imports
(2) The price you pay for your fuel is based largely on import parity price, or the price you would pay if India were to be actually importing petrol or diesel
(3) Oil refiners, who make these products in India, are paid what is called a Refinery Gate Price (RGP)
(4) The method of calculating the price to be paid to refiners means that whenever international oil prices rise, they get a windfall
(5) The national profits are basically under-estimations of actual profitsQuestion No : 6
As fuel prices continue to spike, what does the government seek to do?
(1) The National Democratic Alliance government mulls a ‘windfall tax’ on oil producers
(2) Making fuel pricing in this country a more political statement than an economic exercise
(3) Keeping its fiscal math right for the forthcoming elections
(4) By levying a profit taxation
(5) By relegating a tax, which may come in the form of a cess, will kick at the moment oil prices cross USD 70 per barrelQuestion No : 7
According to the petroleum industry, why profit taxation will be prohibitive?
I. Because a reduction in excise duty and value-added tax on fuel will be more effective in arresting retail price volatility rather than a potential windfall tax.
II. Because it will discourage both domestic and international companies from entering the oil exploration and production industry, keeping India dependent on imports.
III. Because it will be credit negative for PSU upstream companies as the earnings of these companies are already affected by the rise in cess effected in the recent past.
(1) Only I
(2) Only II
(3) Only III
(4) Both I and II
(5) Both II and III
Question No : 8
Which of the following statements best concludes the passage?
(1) The ballooning of crude prices has significantly increased the country's oil import bill and it can also lead to a worsening of the current account deficit and fiscal deficit for the domestic economy.
(2) Fuel prices have become a key political issue
(3) More than global oil prices, it is distortionary policies that make consumers pay through the nose.
(4) The Centre and most of the states are fighting shy of cutting taxes on petrol and diesel even as fuel prices continue to flare up to record levels.
(5) Costly fuel impacts inflation numbers and is a handicap in the election year