What is driving up the fuel prices in India?

India Jun 20, 2021

Amid soaring inflation rates and declining household incomes, the skyrocketing fuel prices have been burning a hole in the pockets of consumers. Prices of petrol in six states have crossed the Rs 100 mark due to a surge of Rs. 4.9 per litre since the beginning of May.

Union Petroleum Minister Dharmendra Pradhan has attributed the hike in domestic fuel prices to the surge in global crude oil prices. In India, the fuel prices differ from state to state depending on the local taxation (VAT) and freight charges. Apart from that, excise duty is charged on auto fuels by the central government.

Fuel pricing mechanism in India

Theoretically, retail prices of petrol and diesel in India are decontrolled and linked to the global crude oil prices. It implies that the fuel retailers such as Indian Oil, Bharat Petroleum Corporation Limited (BPCL), Hindustan Petroleum Corporation Limited (HPCL) have the freedom to fix prices of petrol and diesel based on the calculations of their own cost and profit. These companies source the inputs from upstream oil companies such as ONGC, for whom the benchmark price is derived from the global crude prices.

The price of petrol was decontrolled in the year 2010 while the diesel prices were decontrolled in 2014 by the Government.

How have rising global crude oil prices impacted fuel prices?

As the world economy started recuperating slowly since the onset of the Covid-19 pandemic, the rising global demand for fuel led to a sharp surge in the price of crude oil. The price of Brent crude rose by 37.1 per cent to about $71 per barrel from about $51.8 per barrel at the beginning of the year. This is one reason behind the rising fuel price in India too as the domestic prices are linked to the global crude oil prices.

However, there have been many instances in the last few years since the deregulation of prices when the average price of India’s crude oil basket was as high as $105.5 per barrel but even then the retail fuel price was around Rs 60-70 per litre. Similarly, in October 2018, when the average cost of India’s crude oil basket was at $80.1 per barrel, the diesel rates peaked at Rs 75.7 per litre.

Comparing this with the current scenario, as of June 13, 2021, the cost of India’s crude basket has been recorded at $71 a barrel but the retail prices have been inching towards the psychological Rs 100 per litre mark. Then what is leading to this rally in domestic fuel prices?

Impact of Taxes

The increasing central and state taxes on petrol and diesel are the key reasons driving the fuel prices in India. In Delhi, the central excise duty and state taxes (VAT) account for about 57% of the retail price of petrol and about 51.4% of that of diesel. More than half of the price Indian consumers pay for petrol is tax. According to recent findings, India currently has the highest tax on fuel in the world.

The central government had in 2020 hiked the excise duty on petrol and diesel to shore up the revenues due to the sharp fall in economic activity. Since then, fuel prices have been touching the skies despite the eventual fall in global crude oil prices.

The way out?

The Indian economy is still reeling under the effects of the first and even more disastrous second wave of the pandemic. The Government is currently not considering any cut in the taxes on fuel owing to its lower revenue earnings and pressure on its expenditure front. The Reserve Bank of India has been stressing the need for lowering the fuel tax by the Government as the price hike is leading to inflationary pressure, which is another major roadblock in the path to economic recovery. Hence, the question remains if it is justified to transfer the burden of lost revenue of the Government upon the consumers with already dried up incomes and job losses?

This article has been written by Khanak Sharma for the Paradigm

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