Why Indian Consumers are not able to enjoy the Low global crude prices

During these turbulent times when the international crude oil price has fallen steeply to low levels, the retail price of petrol and diesel in India has not come down even though the supply has outpaced the demand. Whenever demand shocks occur, supply contracts, but oil supply remained plentiful. However, the primary reason why the retail price has not fallen in the country is not due to the market conditions but government intervention. Here's why the retail prices of both petrol and diesel have not come down in the country.

Petrol and Diesel Price Structure

Oil companies in India revise the prices of petrol and diesel daily according to international crude oil prices.

The breakup of retail prices of petrol and diesel found in New Delhi, as of September 2020, reveals that central and states taxes alone comprise roughly 63% of petrol's retail price and 58% of the price of diesel.

At present, the central government taxes the production of petroleum products, whereas the power to tax their sale resides with the state governments. The government charges an excise duty of INR 32.8 per liter on petrol and INR 31.8 per liter on diesel. These make up 40% and 43% of the retail prices of petrol and diesel, respectively.

Current Scenario Regarding Increase in Prices

In September 2020, the government increased Value Added Tax and Excise duty on petrol and diesel, bringing petrol to roughly INR 82 per liter and diesel to INR 73.5 per liter. The government increased Excise Duty on petrol from INR 20 per liter (Feb 2020) to INR 32.98 per liter (Sep 2020) and Excise duty on diesel from Rs15.8 per liter (Feb 2020) to INR 31.83 per liter (Sep 2020). That jump in the levies comes even as international crude oil prices continued a dramatic decline in recent times.
 

Due to that steep jump in the government's excise duty, the price of petrol and diesel in retail outlets remained high, which meant that the benefits of cheap international crude have not passed on to the retail consumers. Nearly 70 percent of the consumer's price for a liter of petrol or diesel is going towards taxes (excise duty and VAT).

The oil marketing companies as well have jacked up their margins sharply, which generally remain around INR 2 to 3 per liter, were taken as high as nearly INR 13 to 19 per liter during this time.

Reason for Increase in Excise Duty

The government has increased duties on petrol and diesel to raise revenues given the tight fiscal situation. The fall in global crude oil prices, alongside the possibility of a worldwide economic recession, has forced the government to raise revenues to support growth. Every rupee hike in excise duty yields roughly INR 13000 crores to INR 14000 crores annually. The fall in global crude oil prices has enabled the government to raise those duties without substantially increasing the burden on consumers. The government's need for revenue has always made them turn towards petroleum products, which have become easy to tax without receiving much backlash from the public.

International crude oil prices are hovering at around USD 41 per barrel—a similar level of oil prices or a bit higher in the years 2004-05, 2015-16, and 2016-17, when the retail price of petrol float around INR 35 per liter, INR 60 per liter, and INR 65 per liter, respectively.

Taxes on petroleum products and its non-inclusion into the GST system is the prime reason it has become the cash cow for the government. Whereas the base price of both petrol and diesel is around INR 22 per liter, the retail price is INR 80 per liter, meaning that taxes account for more than 200 percent of the market price of the product.

Estimation suggests every INR 1 hike in excise duty on petrol and diesel boosts the central government's tax revenue by about INR 14,000 crore. Also, tax collection via cess does not have to be shared with states.


 

Petrol and diesel prices are the highest in the case of India compared to its neighbors whose GDP and per capita income is far less than India's.

Even though India is a developing country with a low per capita income, its local fuel prices are equal to the prices found in the developed nations except for the USA, Canada, and Japan. But the primary reason for the frequent rise in excise duty and VAT is its non-inclusion under the fold of GST highest slab, which would be 28%.

Diesel has always been cheaper as it is believed to be generally used by farmers and truck and bus fleets, and petrol is used by cars and motorcycles i.e., considered as luxury vehicles. Therefore, with the view to reduce the burden on farmers and truck and bus fleet operators, diesel is generally priced lower than petrol.

Since when the government has started giving thrust to cleaner fuels to reduce emissions, what was previously seen as low diesel prices in India now stands amongst a few nations with the diesel price equivalent to INR 78 per liter.
 

Going forward, the international crude oil price is not expected to reach its previous high levels, possibly ever. Given that background, the future trend in the retail prices of petrol and diesel in India remains to be seen since a significant segment of the price is determined by the government.