Diesel and petrol prices have hit record highs across the country, with petrol touching Rs 89 per litre in Delhi on Monday, and diesel reaching a new high of Rs 86.30 per litre in Mumbai.
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Why are consumers in India paying more for petrol and diesel?
Retail petrol and diesel prices are in theory decontrolled — or linked to global crude oil prices. Which means that if crude prices fall, as has largely been the trend since February, retails prices should come down too, and vice versa.
But this does not happen in practice, largely because oil price decontrol is a one-way street in India. So, when global prices go up, the resultant increase is passed on to the consumer, who has to cough up more for every litre of fuel consumed — but when the reverse happens and prices slide, the government, almost by default, slaps fresh taxes and levies to ensure that it rakes in extra revenues, even as the consumer, who should have ideally benefited by way of lower pump prices, is forced to either shell out what she’s already paying, or spend even more for every litre of fuel.
The main beneficiary in this subversion of price decontrol is the government. The consumer is a clear loser, as are the fuel retailing companies.
Early into the novel coronavirus pandemic last year, when crude prices crashed, the state-owned oil retailers stopped price revisions for a record 82 days. The consumer was subsequently hit by a double whammy of sorts — not benefitting from the fall in crude prices in the first half of this fiscal, and then facing record high prices in the second half even as crude prices partially recovered, with the government using the opportunity to raise taxes on petrol and diesel.
Change in prices
Why are crude oil prices rising now?
Prices collapsed in April 2020 after the pandemic spread around the world, and demand fell away. But as economies have reduced travel restrictions and factory output has picked up, global demand has improved, and prices have been recovering.
Brent crude, which was trading at about $40 per barrel between June and October, started rising in November, and has gone past the $60 per barrel mark as the global rollout of Covid-19 vaccines gathers pace.
The controlled production of crude amid rising demand has been another key factor in boosting oil prices, with Saudi Arabia voluntarily cutting its daily output by 1 million barrels per day to 8.125 million barrels per day through February and March.
What is the impact of taxes on retail prices of auto fuels?
The central government hiked the central excise duty on petrol to Rs 32.98 per litre during the course of last year from Rs 19.98 per litre at the beginning of 2020, and increased the excise duty on diesel to Rs 31.83 per litre from Rs 15.83 over the same period to boost revenues as economic activity fell due to the pandemic.
A number of states have also hiked sales tax on petrol and diesel to shore up their revenues. The government of Delhi raised the Value Added Tax on petrol from 27 per cent to 30 per cent. It had hiked the VAT on diesel sharply from 16.75 per cent to 30 per cent in May, but had reverted to 16.75 per cent in July.
Currently, state and central taxes amount to around 180 per cent of the base price of petrol and 141 per cent of the base price of diesel in Delhi. Industry analysts had projected cuts in the central excise duty as prices hit record levels, but Minister for Petroleum and Natural Gas Dharmendra Pradhan recently told Parliament that the government was not currently considering any proposal to cut excise duty rates. In comparison, taxes on fuels as a percentage of pump prices was around 65 per cent of the retail price in Germany and Italy, 62 per cent in the United Kingdom, 45 per cent in Japan, and around 20 per cent in the United States.
By sharply hiking excise duty as global oil prices fell, the government has practically controlled the price of the auto fuels, mopping up any savings that may have accrued to consumers owing to low global prices. Even though the price of India’s crude basket fell from $64.3 per barrel in January 2020 to $19 in April 2020, the price of auto fuels fell only marginally from Rs 75.14 to Rs 69.59 in the case of petrol and Rs 68 to Rs 62.3 in the case of diesel, with the government holding on to most of the gains from lower crude oil prices rather than passing them to consumers.
Besides, the oil marketing companies had halted daily revisions of petrol and diesel prices for 82 days starting March 16, 2020 when the international price of crude oil was at its lowest. Executives of oil marketing companies later explained that lowering prices in line with international prices would have led to negative margins for oil marketing companies. But the consumer was left high and dry.
On the other hand, as the average price of India’s crude basket has increased to $54.8 per barrel in January 2021 from about $40 per barrel in June 2020, the government has kept central levies high, leading to Delhi prices rising from Rs 71 per litre for petrol and about Rs 70 per litre for diesel to Rs 89 and Rs 79.35 respectively, despite the reversal of a 13.25 per cent sales tax hike on the latter.
While the oil marketing companies are notionally free to set prices for petrol and diesel based on international prices, hikes in central levies have meant that the consumer hasn’t benefited from low international prices and has ended up bearing the downside of rising crude oil prices.
How does this situation compare with other countries?
While the price of petrol is just hitting pre-pandemic levels in other countries, India has been seeing record high prices since January due to high state and central taxes. The average price of petrol in India (Delhi) in January was up 13.6 per cent compared to the year-ago period, even as the average price of Brent crude was down about 14 per cent in the same period. Consumers in the US, China, and Brazil paid average prices in January that were 7.5 per cent, 5.5 per cent, and 20.6 per cent lower than the year-ago period.
How will these hikes impact inflation?
Experts note that the impact of rising fuel inflation has been counterbalanced by declining food inflation, but that consumers with greater expenditure on travel are feeling the pinch of higher prices despite overall inflation being down to 4.06 per cent in January.
“Rising fuel inflation may pinch consumers who have to travel further for work and have access to affordable cereals etc,” said Sunil Kumar Sinha, principal economist at India Ratings and Research. He noted that the urban population would be more impacted by rising fuel prices than the rural population — however, a weak monsoon may lead to rural India being hit as farmers are forced to rely more on diesel-powered irrigation.