Ever Rising Prices Of Fuels: Why Are Petrol Prices so High Today in India?

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A daily petrol price revision is a better proposition for many reasons. The first and the foremost is that it allows you to absorb the changes in daily petrol prices in India by a few paise. When petrol prices are revised or changed every fortnight, there is a significant variation in prices. This puts excellent extra pressure on the consumer. In India, petrol prices are revised by the oil marketing companies. They are based on international prices. So, when international crude oil prices gain, petrol prices in India move higher and so on. So, if crude oil prices in the international markets drop, we see a fall in daily or today’s petrol prices in India.

Factors affecting Today Petrol Price in India Cost of Crude Oil

A change in the price of crude oil in the international market affects the price of it in the domestic market. 

An increase in international demand, low production rate and any political unrest in the crude oil-producing countries of the world affect the petrol price. 

Increased Demand

Economic growth in India and other developing countries has led to an increased demand for petrol and other essential fuels. The number of people who own private vehicles has gone up in the recent past. This has contributed to an increase in demand for petrol in India. This resulted in a hike in petrol prices in India. 

Mismatch of Supply & Demand 

Oil refinery companies in India face problems to meet the demands of the market. This is due to the high cost of the input price of crude oil. They are thus resulting in less supply and more demand for petrol in the country—an increase in supply results in a decrease in the price of petrol and vice versa. Oil refining and marketing companies maintain crude oil inventory for six weeks. This also influences the price of petrol and petroleum products.  

Tax Rates

The prices of petrol and petroleum products vary according to local government policies. They impose taxes on fuels.  

When the government raises tax rates on fuels, the oil companies increase the price of petrol. This is to recover losses and maintain marginal profits in the oil business in India.  

Rupee to Dollar Exchange Rate

The rupee-dollar exchange rate is a significant factor that influences the price of petrol in India. Indian oil companies pay the oil imported in other countries’ dollars, but the expenses are in the rupee. So, when the price of the crude oil is in the fall and rupee is also weak against the dollar, it will reduce the gains. When the rupee strengthens against the dollar, and the price of crude oil is low, then the oil companies tend to gain. 

Logistics – Logistics is one of the significant factors in pricing retail fuel. Fuels transported to cities or regions farther from depots will be priced higher. This is less than the places nearer to the oil companies’ storage area.  

The Reason Behind the Change in the Prices of Petrol in Different Cities across India

This difference may be huge between cities that are far from each other. For example, the petrol price in Delhi is Rs.72.38 per litre on 24th January 2018, and the same petrol price is Rs. 80.25 per litre in Mumbai. Various taxes that impact petrol prices in India create fear. It is linked to the rise in petrol prices in India that seems to be never-ending.

Do we blame crude oil for these steep price hikes? Or, is the root cause something different? Well, the answer lies in the fact that crude oil continues to remain cheaper. It is the taxes levied by the governments which are responsible for such high rates. If studies are followed, it would be quite simple to associate the tax factor to the steep hike in petrol prices. Since May 2014, there has been a successive increase in excise duties.

Price Discrepancy Explained

 Data reveals that as of November 2014, there has been a 54 per cent increase in the excise duty on petrol. There is no downward curve in the price of petrol, despite a slash in the excise duty on petrol according to the Budget 2018. This is due to the introduction of Rs. 8 per litre as Road CSS. Daily price revision of petrol has begun from 16th June this year. It has observed that the price rise has happened. As petrol does not fall under GST, the price of it varies across states.

However, when considering the cost & freight prices along with the excise duty, dealer commission, applicable VAT, etc., it has found that the taxes on petrol sums up to be more than its actual cost. Although crude oil has become much cheaper compared to what it had been way back in 2014, it is the corporate taxes levied by the state and the central government that has caused the petrol prices to rise to what it had been in 2014, the highest till date. Despite promises from the government of rolling back the taxes, we are yet to see some positive efforts on this front. 

How Petrol Prices Today in India calculated? 

Petrol prices are a function of many things. Among these include the average of the India crude basket, which added a host of taxes including value-added tax and central excise. At the moment, we have the excise duty levied by the government, which is a staggering Rs 21 per litre. Should this reduction get some respite from a very high retail level of fuel and diesel? The value-added tax differs from state to state.

In cities like Mumbai and New Delhi, the value-added tax is very high, which has resulted in a high price for both petrol and diesel. In India, retail prices are determined by the oil marketing companies, bearing all these things in mind. So, the retail price of petrol in India today is determined by the Indian Oil Marketing Company, which is the largest oil marketing company in the country. For example, it releases the price of petrol every day at 6 am, wherein it is revised at the petrol pumps in the country. The private sector petrol pumps like Shell also determine their prices, though they tend to be higher than that of Indian Oil Company, BPCL and HPCL. 

Why are petrol prices today so high in India?

The fuel is one of the costliest when compared to our neighbouring countries. It recalled that the government earlier subsidized petrol and diesel prices. Nevertheless, the same was aligned with market prices. The government has over the years added to excise duty on petrol. It has made it expensive for consumers. The reason why excise is added before petrol is retailed is to mop-up more resources for social schemes.

However, this leaves the common burden with increased rates on the fuel. The government is looking at the possibility of reducing petrol prices over the longer term. However, it would need to find more longer-term mechanisms to do so. One of them is to add some taxes to Oil and Natural Gas Corporation, which is an oil exploration company. Nevertheless, these are all temporary measures, and one needs to find a more durable long-term solution.  

Impacts on the Economy

Impact on fiscal math

As a rule of the thumb, an increase of $10 per barrel in crude prices will lead to an increase of about Rs17,000 crore (or $2.5 billion at an exchange rate of 67/$) in fuel subsidies, equal to 0.09% of GDP. In the Union Budget 2018-19, the government had budgeted for petroleum subsidy of Rs25,000 crore, Like that in FY18.

Our calculations, Yet, suggest that fuel subsidy could be as high as Rs54,000 crore if crude price averages $65/barrel in FY19. Additionally, a cut of Re1 in excise duty for both petrol and diesel will lead to an annual revenue loss of Rs12,000-13,000 crore (or 0.065% of GDP). It remains to see if the excise duty cut can be resisted by the government, considering the general election is not so far now.

Impact on Current Account Deficit

An increase of $10 per barrel in crude oil prices will lead to an adverse impact of $10-11 billion on the current account deficit. There are two opposite forces at work in the current account deficit. Higher oil prices will push the import bill higher. Higher oil exports and better remittances will partly offset it. The latter will materialize since more than half of India’s remittances are reported to be channelled through the Gulf countries, which are likely to witness better economic conditions with higher oil prices.

An increase of $10 per barrel in crude prices will push the merchandise imports to bill up by about $20 billion. An increase of $6 billion in oil exports and $3-4 billion in workers’ remittances will partly reset it. 

Impact on Inflation 

With a weightage of only 2.4% in headline CPI, the adverse impact will depend on the extent to which higher crude oil prices passed on to the consumers. Considering the general election next year, it is not easy to envisage a hike in retail fuel prices. Thus, the direct impact on CPI inflation is likely to remain muted.

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