Is the government pick-pocketing money from retail consumers in the name of petrol and diesel prices ?

With petrol hitting Rs 89 per litre in Delhi on Monday, and diesel reaching a new high of Rs 86.30 per litre in Mumbai, diesel and petrol prices have hit record highs across the country. Well, proving it, again and again, that fuel is the new gold!

However, the government claims that since October, global crude oil prices have increased by more than 50 per cent to over $63.3 per barrel, prompting oil distributors to lift pump prices. That is only partly valid. Indian consumers are now paying much higher than they did last January, even though oil prices have not yet hit levels at the beginning of the previous year. Pump prices of both fuels are only approaching pre-pandemic peaks in other nations, while Indian consumers are shelling out a lot more.

Why do consumers pay more for petrol and diesel in India?

In principle, retail petrol and diesel prices are de-controlled or related to global crude oil prices. Which means that, as has largely been the case since February, if oil prices drop, retail prices should also drop, and vice versa. But that is not happening. The prices were high even when the global crude prices were at the historic lowest. 

In fact, however, the direct relation of global crude price and fuel consumption price in India does not genuinely exist, mainly because oil price decontrol is a one-way street in India. Thus, the resulting increase is passed on to the user as global prices rise, who has to cough up more for every litre of fuel consumed, but when the reverse happens and prices slide, the government almost by default slaps fresh taxes and levies to ensure that additional revenues are raked, even as the user, who should have benefited from lower pump prices hopefully, is pressured to either fork out what she’s already paying, or spend even more on each litre of gasoline. The government is the key beneficiary of this market decontrol subversion. The buyer, as well as the fuel retailing firms, is a clear loser. Did you just see your entire petrol budget slip into the pockets of the government? well, welcome to the club.

At the beginning of last year’s latest coronavirus pandemic, as crude prices plummeted, state-owned oil retailers halted price revisions for a record 82 days. A double whammy of sorts subsequently hit the market, not benefiting from the fall in crude prices in the first half of this fiscal year, and then facing record-high prices in the second half as crude prices partially recovered, with the government taking advantage of the opportunity to increase taxes on petrol and diesel to fulfil the monetary void in its expenses and revenues.

Why are the prices of crude oil rising?

After the pandemic spread across the world, prices plummeted in April 2020, and demand decreased. Yet global demand has increased and prices have recovered as economies have decreased travel restrictions and factory production has picked up.

Brent crude, which traded between June and October at about $40 per barrel, began rising in November, and has gone past the $60 per barrel mark as the global rollout of Covid-19 vaccines is gaining momentum.

Another main factor in rising oil prices has been regulated crude production in the midst of increasing demand, with Saudi Arabia voluntarily reducing its daily output by 1 million barrels per day through February and March to 8,125 million barrels per day.

What is the effect of taxes on retail auto fuel prices?

Over the course of last year, the central government raised the central excise duty on petrol to Rs 32,98 per litre from Rs 19,98 per litre at the beginning of 2020 and increased the excise duty on diesel to Rs 31,83 per litre from Rs 15,83 per litre over the same time in order to raise revenue as economic activity decreased due to the pandemic.

To shore up their revenues, a number of states have also raised sales taxes on petrol and diesel. The Delhi government increased the Value Added Tax from 27 per cent to 30 per cent on petrol. The VAT on diesel increased sharply from 16.75 per cent to 30 per cent in May, but in July it returned to 16.75 per cent.

State and central taxes currently amount to about 180 per cent of the base petrol price and 141 per cent of the base diesel price in Delhi. As prices approached record levels, industry experts had expected cuts in the central excise duty, but Petroleum and Natural Gas Minister Dharmendra Pradhan recently told Parliament that the government was not currently considering any plan to cut excise duty rates. By contrast, as a percentage of pump prices, gasoline taxes accounted for approximately 65% of retail prices in Germany and Italy, 62% in the United Kingdom, 45% in Japan and approximately 20% in the United States.

The government has practically regulated the price of automotive fuels by dramatically raising excise duty as global oil prices fall, mopping up any savings that could have accrued to customers due to low global prices. Although the price of India’s crude basket fell from $64.3 per barrel in January 2020 to $19 in April 2020, the price of auto fuels fell only marginally in the case of petrol from Rs 75.14 to Rs 69.59 and in the case of diesel from Rs 68 to Rs 62.3, with the government holding on too much of the lower crude oil price gains rather than passing them on to consumers.

Moreover, beginning on 16 March 2020, when the foreign price of crude oil was at its lowest, the oil marketing firms suspended regular revisions of petrol and diesel prices for 82 days. Oil marketing company managers later clarified that reducing prices in line with international prices would have resulted in negative oil marketing company margins. However, the customer was left high and dry.

On the other hand, as the average price of India’s crude basket rose from about $40 per barrel in June 2020 to $54.8 per barrel in January 2021, the government kept central levies high, leading to a rise in Delhi prices from Rs 71 per litre for petrol and about Rs 70 per litre for diesel to Rs 89 and Rs 79.35 respectively, despite the reversal of a 13.25 per cent increase in sales tax on latter.

Although oil marketing firms are conceptually free to set international price-based rates for petrol and diesel, higher central levies have meant that customers have not benefited from low international prices and have ended up bearing the downside of rising prices for crude oil.

How does this scenario compare to other nations?

While the price of petrol in other countries is just reaching pre-pandemic levels, India has seen record-high prices since January due to a high state and central taxes imposed on the wallets of the retail consumers. The average price of petrol in India’s capital Delhi rose by 13.6 per cent in January compared to the same time last year, even though the average price of Brent crude dropped by around 14 per cent in the same period. In January, consumers in the U.S., China, and Brazil paid average prices that were 7.5%, 5.5%, and 20.6% lower than the year-ago period. Sounds competitive, right?

How will inflation affect those hikes?

Experts note that the effect of increasing fuel inflation has been counterbalanced by decreasing food inflation, but that, amid overall inflation, customers with higher travel spending believe that the pinch of higher prices is down to 4.06% in January.

Sunil Kumar Sinha, the principal economist at India Ratings and Research, said that rising fuel inflation could pinch customers who have to travel further for work and have access to affordable cereals etc. He noted that increasing fuel prices would affect the urban population more than the rural population, but a poor monsoon will result in rural India being hit as farmers are forced to rely more on diesel-powered irrigation.

Conclusively, we can say that this enormous rise in the prices of petrol and diesel across the country when the global crude prices are high as well as when the global crude prices were at their lowest is benefitting no one but the government ex-chequer. The retail consumers are bearing the brunt of global price rise on some days and the government shortfall on the others.

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