Arshad Shaikh studies the rise and rise of the prices of diesel and petrol in India. Fuel prices contribute significantly to core inflation. Although the fluctuating prices of crude oil in the international market more or less set the prices of petrol and diesel, for Indians their trajectory has always remained flat or northward. Why is it this way? Who benefits from this policy? Is there any alternative? The mainstream media should be asking these billion-dollar questions.
A cursory glance at the graph of the prices of diesel and petrol in India will reveal a line that does not know how to climb down. There is only a resolute movement to the northeast. This unilateral increase can also be seen in the table below that records the steadily increasing petrol price per litre (₹) in New Delhi:
| YEAR | 2000 | 2002 | 2003 | 2005 | 2006 | 2011 | 2014 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 |
| Price | 25 | 26 | 32 | 40 | 47 | 63 | 71 | 75 | 75 | 82 | 95 | 105 | 96 |
So why are fuel prices in India always rising? Does it have any impact on inflation? Can the government do anything to reduce the prices? How much subsidy do we receive for our diesel and petrol or are we paying upfront or even more than we should? Are the prices of fuel in India regulated by the government or governed by the market? Who actually sets the final price, the oil companies or the government? How much of the petrol or diesel that we use comes from abroad? What is the share of domestically produced oil? Who are the big players in this market globally and in India? What impact did the Ukraine-Russia war have on the prices of petrol and diesel?
PRICE DETERMINANTS
The price of fuel in India is determined by several factors like the cost of crude oil, the price charged to dealers, commission for dealers, central excise duty, Sales Tax or Value Added Tax (VAT), demand for fuel, consumption ratio of refineries, and the exchange rate of the rupee against the US dollar. Petrol and diesel are extracted or refined from crude oil, which is a dark sticky liquid (some call it “black gold”).
India gets most of its crude from OPEC (Organisation of the Petroleum Exporting Countries). After the war in Ukraine, India imports a substantial amount of crude from Russia.
“Brent” is the leading global price benchmark for crude oil and sets the price of nearly 66% of the world’s internationally traded crude oil supply. The price of Brent keeps fluctuating as it is traded heavily in the oil markets through forward contracts and other speculative financial instruments.
The price of crude is directly influenced by geopolitics and production cuts announced by OPEC from time to time as the countries that drive OPEC want to maintain profitable pricing in the face of a sluggish global economy.
An important component of the price of petrol (or diesel) is the commission the Oil Marketing Companies (OMCs) have to pay the petrol dealers for their services. The big names among OMCs in India are Indian Oil, Hindustan Petroleum, and Bharat Petroleum.
Then there is the freight and refining cost incurred by the OMCs. All these costs are ultimately passed to the consumers.
A huge part of the price includes the taxes levied by the Central and state governments.
Other major determinants of fuel prices in our country are the consumption ratio of refineries and the valuation of the Indian Rupee against the US dollar. If the refineries are unable to process the crude into finished products like petrol and diesel then the demand exceeds supply leading to a rise in prices. Similarly, if the demand for the dollar increases in the exchange market due to the monetary policies of the Federal Reserve, the Indian Rupee devalues and fuel prices taking an upward turn.
THE STICKY COMPONENT
If we analyse the cost components of the price of a litre of petrol, we realise that the base price makes up only half of the final cost to the consumer. This means that the government (Centre and State) is adding almost 45% to the cost of fuel in terms of various taxes like excise, VAT, etc.
The justification for the policy of the government to make the consumer pay through his/her nose was best explained by former Director of National Institute of Public Finance and Policy (NIPFP), Dr. Rathin Roy in an interview to the Indian Express.
The noted economist, who was also member of the Economic Advisory Council to the Prime Minister of India, said, “People who are rich should consume less of something when prices go up, at least in the same proportion. If that is not happening, then I do not see a case for intervention because the opportunity cost of intervention in these circumstances is greater than the benefit to those segments of such intervention.
“The opportunity cost of lower taxes on petrol now is to further increase petroleum demand. So, consumers must walk the talk. If it’s hurting you, how come I see you are not consuming less. Elasticity of demand for petroleum products is -0.24, that means for every 1 rupee rise in prices, the consumption falls by just 24 paise.”
The government knows that demand for fuel in India is highly inelastic and people will continue to purchase it whatever the cost. This can be termed as opportunism at best and exploitation at worst.
(Table A– Price of Petrol at Delhi effective 01-Jan-22, source Indian Oil Corporation Ltd.)
| Base Price | Freight etc. | Price Charged to Dealers (excluding Excise Duty and VAT) | Add: Excise Duty | Add: Dealer Commission (Average) | Add: VAT (including VAT on Dealer Commission) | Retail Selling Price at Delhi(Rounded) |
| ₹ 47.98 | ₹ 0.25 | ₹ 48.23 | ₹ 27.90 | ₹ 3.78 | ₹ 15.50 | ₹ 95.41 |
THE BILLION DOLLAR FACTS
The fuel prices in India are always rising because the rupee is fighting a losing battle against the dollar in the exchange market. Core inflation is heavily influenced by the rising price of fuel. The government is the ultimate arbiter of the price of fuel in the country.
The main justification offered by the government for taxing this essential commodity to the tune of 100% is that the revenue accrued goes towards the welfare of the poor. This means the poorpay for the welfare of the poorand not the rich. The moral weakness in adopting this policy is too glaring to be ignored.
Petrol and diesel were deregulated from June 2010 and November 2014 onwards respectively. Thus, the government stopped subsidising the OMCs for any losses they may bear for selling fuel below cost. The share of domestically excavated oil is around 15% of its total requirement.
Fortunately, for India, the Ukraine-Russia war acted as a blessing in disguise as far as the oil market is concerned. Today Russia supplies nearly 42% of all crude oil that is imported by India.
RBI Governor, Shaktikanta Das raised the issue of fuel prices in a Monetary Policy Committee (MPC) meeting in February 2021, saying, “Proactive supply side measures, particularly in enabling a calibrated unwinding of high indirect taxes on petrol and diesel in a coordinated manner by centre and states are critical to contain the further build-up of cost-pressures in the economy.”
Will the governments agree for such unwinding? They may well heed the advice by the former PM of England, Sir Winston Churchill, who said, “We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”