Rise and rise of petrol and diesel prices

Anfor Haque (anforhaque@gmail.com)

Currently, Petrol price is soaring to a record high, by crossing the Rs 100 mark in almost all states and Union territories in India, while others are also sensing the century mark. Diesel price has also crossed Rs 90 per litre in almost all states. The rise of fuel prices always has a major impact on the overall economy, affecting all sections of people directly or indirectly. The factors and the mechanism for ups and downs in fuel prices is a complex subject.

In India, petrol and diesel are the major energy drivers of the Transportation, Agriculture and Industrial sectors. India's increasing demand for petrol and diesel is catered through indigenous and imported crude oil as raw material. The amount of crude oil that the country is currently producing is only 15% of the total requirement. Therefore, India is predominantly relying on imported crude oil. As such, price fluctuation in the global market has a direct bearing on the prices of petroleum products in India. The crude oil price is sensitive to various factors, but in general, the long-term trend is factored by demand and supply, while the short-term variations depend on economic and financial factors such as business cycle and market speculation. The global oil market is mostly controlled by oil-producing countries, especially OPEC+'s decision to increase and reduce production. Sharp ups and downs of global oil price is noticed over the past few decades due to the impact of several contingencies, including geopolitical situation, economic and financial slowdown, terrorist attacks and natural calamities. As the pricing of the Indian basket of Crude Oil represents the average of Oman & Dubai for sour grades and Brent (Dated) for a sweet grade, change in global crude oil price will directly impact the Indian end-users.

The pricing of petroleum products was regulated under the Administered Price Mechanism (APM) till 2002. The various oil pool accounts were maintained to ensure stability in selling price, insulate consumers against international price fluctuations and subsidization on the price of certain products like kerosene, LPG. In 2010, the government deregulated the petrol price and later in 2014 diesel was also decontrolled. Under this changing scenario, the price of petroleum products in India is dependent on the change in global oil prices. Price decontrol provides retailers such as IOCL, HPCL or BPCL the freedom to fix prices of petrol or diesel based on the price at which they source their raw materials from upstream oil companies such as ONGC or OIL, for whom the price benchmark is global crude prices.

From June 2017, India's state-run oil marketing companies revised petrol and diesel price daily adopting the dynamic fuel pricing model. There has been a question in the customers' minds whether dynamic fuel pricing is followed in a real sense. Is the increase or decrease in global oil prices getting reflected in a similar pattern in the domestic prices of petroleum products? For instance, in October 2018 crude oil price was $ 80.08 per barrel and the corresponding price of petrol and diesel in Delhi was about Rs 82.00 and Rs 75.00 respectively. During the global COVID-19 lockdown, the prices of international crude oil dropped to less than $20 a barrel in April last year. However, the domestic retail price of petrol and diesel continued to stay as high as Rs 70.00 and Rs 62.00 respectively. This implies that even when international crude oil prices declined, the government decided not to let domestic fuel prices drop proportionately. Instead, it raised taxes on fuels to compensate for the loss of other revenues. The exchange rate is also a major determinant for the fluctuation of fuel prices, as the Indian rupee has weakened against the US dollar from a level of Rs 45 to Rs 75 in the last ten years.

When the opposition parties cited the example of maintaining the petrol and diesel price below Rs 73.00 and Rs 55.00 respectively for the period 2011 to 2014, while the international crude oil price was above $ 100 per barrel, the present government nullified the claim by saying that the UPA government had issued Oil bonds of Rs 1440 billion to state-owned oil companies to make up for the difference in the artificially suppressed retail selling price of fuel and cost. These oil bonds and the interest thereon are being paid now.

Taxes imposed on petrol, diesel and crude oil, is playing a key role in price rise. The Price Buildups of petrol and diesel show that the customers are paying taxes - Central Excise and VAT combined, more than 100% on base prices. As state VAT is in the percentage of the base price, any increase in the base price of petrol and diesel, there will be more taxation on these commodities. Thus, Petrol and diesel have become some of the highest-taxed commodities in India.

With petrol prices rising day by day, the government is under immense pressure to reduce taxes and demand for implementation of GST replacing central excise duty and VAT on petrol and diesel. When GST was introduced in July 2017, five commodities—crude oil, natural gas, petrol, diesel and aviation turbine fuel—were excluded from its ambit, since the Centre and states depended heavily on these for their revenues. The general expectation is that if the central and state taxes are replaced by GST, where the highest tax slab is 28 %, there would be a substantial reduction in fuel prices, but on the other hand, contributions to the Central and State Exchequers will be reduced drastically. The Indian economy which is recovering from the effects of the pandemic, may not be able to bear the impact. If at all the government decides to put petrol and diesel under GST, the slab would be much higher than 28%. There has always been a blame game between the Central and State Governments on high taxes and non-implementation of GST, but in reality, both the Centre and the States are reluctant to lower taxes. The Centre and the States have justified their decisions to tax fuels heavily by claiming that the revenue collected is utilized for social programmes and building infrastructures. At the last GST Council meeting, it was decided that it was not "the right time" yet to include fuel within GST. As such, an immediate reduction in petrol and diesel prices are not in sight, provided there is a cut in global oil prices or a reduction in taxes.

However, it is most unlikely in the immediate context as predicted by experts; and consumers will have no option but to bear with the high cost of petrol and diesel.