Why Do Fuel Prices Continue To Skyrocket? All You Need To Know

Why Do Fuel Prices Continue To Skyrocket? All You Need To Know
Source: Report Wire

Petrol price has now reached close to or above 100 in over 12 states and union territories– Rajasthan, Madhya Pradesh, Maharashtra, Andhra Pradesh, Telangana, Karnataka, Jammu and Kashmir, Odisha, Ladakh, Bihar, Kerala and Tamil Nadu. Fuel prices reached a record high value last week, with Mumbai’s petrol price reaching a staggering ₹105 and retailing at ₹104.90 per litre in the city and diesel at ₹96.72 a litre. The unidirectional climb in petrol prices continues to be a matter of grave concern for India, especially for metro cities. The cost of buying petrol in Mumbai is now twice as much as in New York. The month of June saw fuel prices rise around 16 times, according to price notification by the oil retailers.

The Organization of the Petroleum Exporting Countries and allies known as OPEC + led by Saudi Arabia, continues to reduce the rate of production in order to maintain the high pricing of crude oil, with critics highlighting this to be a tactic to make up for the previous year’s loss caused by the pandemic. In India, nearly 80 percent of its domestic oil demands are fulfilled by foreign imports. There are approximately 160 different types of crude oil traded in the global market with variations in viscosity, density, weight, fluidity and volatility. Crude oil is known by its geographical identities such as Brent Crude, Oman Crude, Dubai Crude, OPEC Reference Basket, West Texas Intermediate (WTI). The Indian crude price is calculated based on the weighted average price of Brent, Oman and Dubai often called the Indian Basket (IB) or Indian Crude Basket. This purchased crude oil then needs to be refined by refineries and state-owned Oil Marketing Companies (OMCs) like Hindustan Petroleum Corp. Ltd. (HPCL), Indian Oil Corp. Ltd. (IOCL) and Bharat Petroleum Corp. Ltd. (BPCL). 

Global oil prices rose roughly 2 percent last Thursday as the rise in fuel demand has caused supply to tighten. The average price of the Indian Basket Crude oil increased by 119 percent from $30.61 a barrel in May 2020 to $66.95 a barrel in May this year. Brent crude prices had crashed to $19 per barrel in April 2020 because of lockdowns and travel restrictions in various countries. However, on June 23, 2021, Brent prices touched $75.32 a barrel, the highest in more than two years, raising concerns among consumer nations like India.

Indian Consumers Continue To Miss Out

In theory, the impact of crude oil prices globally are supposed to impact the retail prices of petrol and diesel in the domestic market of India. This implies that if the crude oil prices fall internationally then the retail price should come down too, and vice versa. The other external factors that impact the fuel price in India include the rupee to US dollar exchange rate, global cues, demand for fuel, and so on. However, despite the international crude price falling by 13 percent last year, Indians paid 13 percent higher prices (considering the average price of petrol to be 88 per litre) from January 2020 to January 2021. Indian consumers failed to receive the benefit of low global crude oil prices largely due to the role of increasing excise tax and VAT slapped by the central and state government on petrol and diesel.

The past six months saw the increase in crude oil prices internationally. This is also linked to a sudden surge and repeated price changes in fuel that took place from the month of May after the two-month freeze in fuel price hikes in the election months of March and April. In India, the OMC’s are theoretically free to set their own prices for petrol and diesel – based on international prices. For example, in Delhi, based on the pricing in February the refineries buy crude oil at 29.34 per litre. OMCs charge the dealer 29.71 and the Centre levies 32.98 as excise duty. Dealers then add a commission of 3.69. This is followed by the state’s VAT or sales tax of 19.92. Finally, the consumer pays 86.30 a litre at the petrol pump. 

The government has no control over the pricing. This is done so that the Indian consumer gains from the falling prices internationally. However, the retail selling price of fuel gets doubled post the addition of the excise duty, VAT, and dealer commission. The tax from the centre and the state government together account for 58 percent of the retail selling price of petrol and around 52 percent of the retail selling price of diesel at present. So if the price of petrol is 100 per litre, the state and centre make 58 through tax. A further breakdown shows that the centre’s excise duty is around 32-33 and the remaining is VAT that is levied by the states.

Will The Government Slash Taxes?

The Centre had raised excise duty by ₹13 and₹16 per litre on petrol and diesel between March 2020 and May 2020 in two instalments to bolster its revenues during the pandemic. Five years ago, the central government’s excise duty collection from petrol was 29,279 crore in 2014-15. The collection amounted to 89,575 crore during the April to January period of 2020-21 owing to the rise in taxes last year. Similarly, for diesel, there was a hike from 42,881 crore in 2014-15 to 2,04,906 crore in the April to January period of 2020-21. 

Every state in India has different rates for fuel. In Chennai, the price of petrol as of July 5 was ₹100.75/ litre, ₹99.84/litre in Kolkata, ₹99.86/litre in Delhi and ₹103.20/litre in Bengaluru. The divergence in fuel prices is due to local taxes such as VAT and freight charges that vary from state to state. Rajasthan currently levies the highest VAT on petrol and diesel, followed by Madhya Pradesh, Odisha and Maharashtra. The data from Petroleum Planning and Analysis Cell (PPAC) shows that contribution to the state exchequer in the form of sales tax and value-added tax of petroleum, oil, and lubricants increased by 46 percent from 137,157 crore in 2014-2015, to 200,493 crore in 2019-20, and reduced to 135,693 crore during the first nine months of 2020-21.

Experts have warned that the rising fuel prices will lead to increased inflation and a decline in consumerism, which could derail India’s economy that is already under pressure due to the impact of the second COVID-19 wave. Despite the people’s woes on rising fuel prices, the government depends on the taxes on fuels to fund welfare projects. “The excise duty rates have been calibrated to generate resources for infrastructure and other developmental items of expenditure keeping in view the present fiscal position,” said Minister of State Anurag Singh Thakur.

 

Read more: World Watchdogs Propose Remedies For Cash-strapped Money Market Funds

 

With the country going through repeated cycles of lockdowns, India’s Gross GST revenue fell to ₹1.02 lakh crore in May, from a record ₹1.41 lakh crore in April. Economists expect a further dip in collections for June even though the current lockdowns may not affect activity as much as last year’s national lockdown. With depleting revenue from GST, experts warn a decline in revenue from the rising excise tax on fuel could prove to be a problem. 

According to a report by the Wall Street brokerage Bank of America Securities, “Risks from higher oil prices are generally manageable in the financial year 2021-22, given the scope to adjust excise duty and other factors. But, risks are greater in 2022-23 based on our global oil price forecast, now revised up to $75 a barrel, from $60 previously for 2022.” With fuel consumption expected to go up to pre-pandemic levels next year, this will leave the economy prone to the risk of higher inflation levels. The government should aim to cut excise duty to some extent within the window available this year.

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