Relevance: GS-3 (Indian Economy, Inflation, Energy Policy) | Source: The Hindu / Indian Express

1. What is the News?

Oil Marketing Companies (OMCs) have sharply increased the prices of commercial LPG (including the small 5-kg cylinders) and bulk diesel. At the exact same time, the government has reduced the export tax on diesel and aviation fuel for big oil refineries.

2. The Real Impact 

While domestic household LPG prices were kept unchanged, economists point out major flaws in this current pricing strategy:

• Post-Election Shock: Fuel prices were informally “frozen” by the government before elections to keep voters happy. Now, OMCs are aggressively recovering those financial losses.
• Hurting the Poor & MSMEs: Hiking the big 19-kg cylinder hurts small restaurants and bakeries. Worse, hiking the small 5-kg cylinder directly punishes street food vendors, daily wagers, and migrant workers who rely on them.
• Favouring Big Refineries: Reducing export taxes allows massive oil companies to sell their fuel to other countries and make huge profits in dollars, while domestic small businesses suffer.
• Hidden Inflation: When commercial fuel becomes expensive, dhabas and small factories are forced to increase their prices. Ultimately, the common man still suffers from Cost-Push Inflation.

UPSC Value Box 

• Cost-Push Inflation: A situation where overall prices rise (inflation) because the cost of raw materials and production (like commercial fuel) has gone up.
• Special Additional Excise Duty (SAED): The formal administrative term for a Windfall Tax. It is a special tax levied on crude oil producers and refiners when they make sudden, massive “super-profits” from exporting oil.
• Under-Recoveries: The massive financial losses suffered by government Oil Marketing Companies (OMCs) when they are forced to sell fuel below the actual market cost.

Q. With reference to the pricing and taxation of petroleum products in India, consider the following statements:

1. The Special Additional Excise Duty (SAED), commonly known as a windfall tax, is levied primarily on the retail consumers of petrol to discourage fossil fuel consumption.
2. In India, the retail prices of petrol and diesel are officially regulated and legally fixed by the Central Government on a monthly basis.
3. Cost-push inflation can occur in the economy when the retail prices of commercial fuels are increased by Oil Marketing Companies.

Which of the statements given above is/are correct?

(a) 1 and 2 only (b) 3 only

(c) 2 and 3 only (d) 1, 2 and 3

Correct Answer: (b)