Fuel Prices Roaring in India

By -
Criti Mahajan
 THE CURRENT SCENARIO IN INDIA

State Oil marketing companies have hiked the prices of petrol by over Rs. 2 per litre and nearly Rs.
3.50 per litre, being the highest since October 2019.

THE REASON

1. Rising international crude oil prices and the faster recovery of demand for petroleum products due
to opening up of the economy and the prospects of a viable vaccine against the rising cases
worldwide. The vaccination drive is ready to roll out in UK , US and Canada.

2. Weakening rupee-dollar exchange rate post March- we pay more for the oil that we import.

3. Excise duty levied by the central government and VAT by state government to boost their revenues
and is expected to garner Rs. 1.6 lakh crore additional revenue.
 Increased Fuel Prices in Cities (Dec’20)
78.27
Bangalore
86.51
77.44
Kolkatta
85.13
79.21
Chennai
86.51
80.51
Mumbai
90.34
73.87
Delhi 83.71
0 10 20 30 40 50 60 70 80 90 100

Petrol Prices (Rs/ Ltr) Diesel Prices (Rs/ Ltr)

Delhi has the cheapest fuel price compared to other cities because Delhi government had
reduced VAT by Rs.10 in the month of July. We observe that the consumers in various cities
are paying exorbitant fuel prices hence any increase in the fuel price pushes up the prices of
commodities adding up to the CPI inflation of the country.
 TAX COLLECTION BY GOVERNMENT

State and central taxes currently account for around 60% of retail price of petrol and 57.5% of
retail price of diesel in the national capital which exploits a common man. The excise duty and
VAT have fetched enormous tax collection for the government in the last 3 years. To note, 42%
of Centre tax collection has to be transferred to the state government.

Year Tax Collection by Centre (Rs Crore) Tax Collection by State (Rs Crore)

2017-18 3,36,163 2,06,863

2018-19 3,48,041 2,27,591

2019-20 3,34,315 2,21,056

 WHAT DETERMINES RETAIL FUEL PRICES

E.g.
Constituents of Fuel Price

Break-Up of Petrol Diesel

26
Retail Fuel Price (Rs./Litre) (Rs./Litre)
27
Diesel Base Price 27 26
Petrol
70 83 33 Excise Duty 33 32
31
4 Dealer's
19
Commission 4 3
3
10 VAT 19 10
Base Price Excise Duty
Dealer's Commission VAT Final Price
Final Price Consumer Pays 83 71

The excise and value added tax constitutes above 62% of total actual price of fuel which pinches
a common man’s pocket. These prices may come down post pandemic period.
 THE PRICE TRAJECTORY OF FUELS IN INDIA

85
Price Trend of Petrol in FY 2020 14
12.86
82.09 82.34
80.43 80.43 81.06 81.06 12
80 10

8
75 73.33 6
71.89 71.26
69.63 69.59 4
70 2.39 2.06
1.57 2
0 0
65 -0.05 -1.31 0
-1.77
-2.46 -2.95 -2

60 -4
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV

PETROL (Rs/Litre) % CHANGE

As soon as the World Health Organisation had declared the global pandemic, the petrol
and diesel prices dipped in India owing to the slipping international crude oil prices. On
June 7, 2020 the fuel prices were increased by Rs 10 per litre by the government to cut
off their losses that they had to bear in the last 82 days of lockdown period.
Substantially the fuel prices remained stable till November.
 Price Trend of Diesel in FY 2020
90 20
80.53
16.05
80 73.56 73.62
70.63 70.46 72.42 15
69.39
70 66.34 64.52 11.39
62.33 62.29
60 10

50
5
40
2.78
0.08
30
-2.44
-0.06 -0.24 0
-2.58
20 -3.12
-4.06 -5
10
-8.66
0 -10
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV

DIESEL (Rs/Litre) % CHANGE

The diesel rates were declining from January till April, but between May and June, the oil
marketing companies decided to resume their daily revision of fuel prices hence we see a
surge in diesel prices in June by Rs. 11/litre. Thereafter, the prices remained stable and
hovered around Rs. 73 / litre to Rs. 72 / litre till November.
 PRICE TREND OF Brent Crude Oil
(US$/barrel)

49.16 50.13
45.6
43 41.7
40 39.52

June July August September October November December

India imports Brent Crude produced in North Sea Oil fields and imports Dubai/Oman Crude from
OPEC nations. In April 2020, the Brent Crude and Dubai Crude were priced at $ 27/barrel and
$20/ barrel compared to West Texas Intermediate (WTI) at $-37.63/barrel. The crude prices were
low due to no demand for oil and secondly running short of storage facilities for excess oil as a
result of the lockdown restrictions imposed. Gradually, as the economy opened up, the crude oil
prices were on inclining trend.
 FACTORS AFFECTING OIL PRICES IN INDIA

1. Rise in international crude oil Prices, low production, low supply and any political unrest in
crude oil-producing countries.

2. Spiralling demand due to modernisation, progressive economic growth, large vehicle fleet on
road.

3. Increased tax rates on fuels force the oil companies to raise the price of fuel to recover losses
and maintain margin profits in oil business.

4. Logistics are severely impacted because there is huge variation in fuel prices and charged
differently across the states.

5. Oil marketing companies always have to keep their inventory stockpiles since the domestic
supply is limited compared to the demand hence they fix the retail prices accordingly.

6. If the rupee is strong and the price of crude oil falls, the oil marketing companies can gain. But
if the rupee weakens and price of crude falls then the oil companies will have to pay more to
buy imported oil and thereby increases our import bill and our foreign exchange earnings flow
out.
 CONCLUSION

1. India relies heavily (88%) on imported Brent crude and OPEC reference oil while
12% domestic demands are met from domestic production of oil.

2. The fuel rise in India is not merely dependant on international crude oil prices but
primarily driven through the heavy taxes imposed on base price by the government to
balance the tightened fiscal deficit and boost revenues when the rest of the economic
activities are still lagging.

3. India is upcoming with its 2 major oil storage capacity in Chandikhole, Odisha and
Padur, Karnataka of 4 MMT and 2.5 MMT beside the existing oil storage reserves in
Vishakhapatnam, Padur and Mangalore. If India import and store excess oil in these
oil reserves when the crude prices are low, then it will depend less on oil imports and
save import bills thereby improving the current account deficit.