Rising Fuel Prices in India


A few days back, a man in Bhopal posed with a cricket bat and a helmet in front of the petrol station as fuel prices crossed the ₹100 mark in Madhya Pradesh. It was the first time in Indian history that the price of petrol touched ₹100 per litre. Prices have risen so high that fuels and their variants are being smuggled from neighbouring countries like Nepal. Let us take a look at the trends, the price break-up and the implications of high fuel prices in India.


Let’s understand the break-up of fuel prices in India. The international price of 1 barrel of oil is $65. A barrel has 159 Litres of oil, so the cost per litre comes to around Rs.29.96 (exchange rate of Rs.73.31/USD). Then comes the freight cost, OMC margin, the central excise duty and commission to the dealers. The excise duty charged by the government was Rs.19.98 in March 2020. It has now become almost Rs.33 in February 2021. This is a 65% increase. VAT has also increased from 27% in March 2020 to 30% in February 2021. Now the total taxes make up 60% of the prices the consumers pay. A VAT of 16.75% is charged on diesel by the state governments. So the final retail prices become as high as Rs.100. The retail prices of fuel in neighbouring countries like Sri Lanka, Nepal, Pakistan and Bangladesh are much lesser than those in India. An analysis of the petrol price in the past reveals that Mumbai has had the highest prices among other metropolitan cities. Due to the difference in the tax structure, diesel prices in India have been lower than petrol prices. However, this gap is closing down as we move forward.


In April 2020, the West Texas Intermediate crude oil price went to a negative $40 per barrel. This meant that if you own a contract for delivery in the next month, you’re paying the person with the oil to not sell you the oil. The coronavirus pandemic caused a plummet in the oil demand, which led to excessive oil in storage left to be sold. A supply surplus put downward pressure on the oil prices in April. Fuel prices in India are linked to global crude oil prices. So, if the global prices fall, then the retail price must fall. However, this doesn’t happen.


In April 2020, the global crude oil prices fell due to the decreased consumer demand aggravated by the pandemic. The government, when the global crude oil prices fall, doesn’t allow the same effect on the consumers. They introduce new taxes and duties to earn extra revenues. Crude oil price forms only 40% of the price base. So excise duty on both petrol and diesel was hiked by Rs.3 and special excise increased by Rs.2 and Rs.4 for petrol and diesel respectively. The central government also introduced a road and infrastructure cess of Rs.1. Therefore, the layered break-up of prices, as well as the new government additions to this break-up, have caused the high price levels that we see in the nation at present.


The hike in fuel prices closes the gap between the disposable income and the expenditure of the consumers. They try to reduce expenditure on luxury items to make ends meet. Not only the consumers, but costs for various crude-oil-based industries rise too. This increases the price of the products in the market. Investment in financial assets goes down as well - a bad sign for the stock market.


Tax revenue has grown only from the excise duty on fuel during the pandemic; oil minister Dharmendra Pradhan said that there will be no cut in taxes despite criticism by the people.

References:


https://tradebrains.in/petrol-diesel-price-history-india/

https://www.jpmorgan.com/wealth-management/wealth-partners/insights/what-do-negative-crude-oil-prices-even-mean

https://www.financialexpress.com/market/commodities/explained-why-is-petrol-diesel-prices-not-falling-despite-crude-oil-prices-crashing-below-zero/1936156/

https://www.mycarhelpline.com/index.php?option=com_latestnews&view=detail&n_id=417&Itemid=10