Why Petrol Prices in India are not falling?
In the wake of the spread of the novel coronavirus, COVID-19, many businesses have been severely impacted. One such business is the oil industry.
The crude oil price has been falling since March as countries imposed lockdowns and put a hold on travel. The three biggest consumers of oil- road transportation(passenger cars and freight vehicles), the aviation industry, maritime shipping representing 49.3%, 7.8% and 6.7% respectively.
One would expect that due to the fall in global crude prices to about $30/bbl, petrol and diesel prices would also fall. But, this may not be the case in India. Why is this so? Let’s try to find the reasons behind the steady-fuel prices in this article.
HOW IS FUEL PRICED IN INDIA?
Let us see what all goes in converting crude oil into the fuel we can use such as petrol and diesel.
Firstly, the Oil exploration and production companies extract crude oil from oil wells. This fuel then needs to be refined by refineries and Oil Marketing Companies(OMCs) need to pay a cost for this known as the refinery transfer price. The transportation costs and excise duty costs are also borne by the OMCs. All these costs, in the end, are paid for by the consumer.
India follows the Dynamic Fuel Pricing system to determine the cost of petrol and diesel. In this system, the fuel prices are revised daily and the Government has no control over the pricing. This is done to transfer any gain due to falling oil prices on a daily basis to the consumer. The Government then imposes taxes on the base price.
Regular revision of oil prices, in reality, does not have much of an impact as the oil prices do not change significantly on a daily basis. However, fuel prices are largely affected if there is a major global event affecting crude oil prices.
THEN WHY ARE THE FUEL PRICES NOT FALLING EVEN AFTER THE MAJOR GLOBAL FALL IN CRUDE OIL PRICES?
Though there has been an exponential increase in fuel prices over the decade, they have remained quite stable in the past couple of years, despite crude oil price fluctuating every now and then.
As on 7th May 2020 Citizens in Delhi have to pay Rs 71.26 and Rs. 69.39 for a litre of petrol and diesel respectively. While the prices of petrol and diesel in Mumbai hover at Rs 76.31 and Rs 66.21 respectively.
The reason behind the price remaining stable even after such fluctuations are due to the way in which the Government controls the taxes.
It’s shocking to know that in a price-sensitive market like India more than 50% of the fuel price is actually central and state government taxes. This makes fuel rank amongst one of the largest revenue earners for the government. It should also be noted that OMCs have not revised the basic selling price of both petrol and diesel since March 16.
Recently, several states like Uttar Pradesh, Assam, Nagaland, Maharashtra, Karnataka, and West Bengal hiked Value added tax(VAT) by Re 1-Rs 1.5 per litre. Also, the component of taxes is much higher in Maharashtra, Tamil Nadu and a few other states that keep petrol and diesel retail prices much higher for customers in these states.
Talking in terms of numbers, while the customers are paying Rs 71.26 for petrol and Rs 69.39 for diesel in Delhi (as on May 6), the base fuel price is actually Rs 18.28 a litre for petrol while diesel at Rs 18.78 a litre in Delhi.
That’s more than half of the prices paid in taxes. Bifurcating it further, Central taxes (excise duty) on petrol and diesel stands at Rs 32.98 and Rs 31.83 per litre, respectively, while Delhi levies a VAT of Rs 16.44 per litre on petrol and Rs 16.26 per litre on diesel, effectively taking the total tax component on the two auto fuels to a staggering 75 per cent (approx).
Shockingly, India has the highest tax component on fuel!
However, the 75% taxes are exceptional case due to the recently hiked Excise duty by the government to offset the losses suffered due to the Coronavirus crisis. In normal days, the ratio of taxes is usually 55% of per litre price charged to the consumers.
LET US SEE WHY THE GOVERNMENT IS INCREASING TAXES
- FISCAL TROUBLE
The government both spends and earns money. The difference between these is referred to as the fiscal deficit. The finance ministry was aiming to bring down the fiscal deficit to 3.5% but, this seems unlikely and the deficit will mostly like increase by a wide margin as government earnings slow down while it spends more on stimulus packages. Hence, the government is trying to make up for this shortfall by increasing taxes on oil.
2. FALL IN RUPEE
The import bill does not only depend on the crude oil prices but, it also depends on the rupee-dollar exchange rate as all bills need to be paid in dollars. The recent sell-off in Indian markets by foreign companies has depreciated the India rupee vis-a-vis the U.S. Dollar. Since January, Indian Rupee has fallen a massive 6% to settle as $1 = Rs. 75.38
3. DISINVESTMENT
The fall in crude oil prices is not really a good thing for oil companies as this impacts their earnings. Oil marketing companies lose money in a falling oil market, as they buy oil at a particular price and by the time it is refined and made usable it loses value. This is not favoured by the government as it aims at disinvesting 53.29% stake in Bharat Petroleum Corporation. The government expects to gain about Rs.60,000 crore from this deal and this is a big share of the 2.1 lakh crore disinvestment target for the financial year ‘21.
While the government has kept the customers away from enjoying the real benefits of lower fuel prices, it has kept its tax collections strong. The Centre collected over Rs 2,14,000 crore from excise duty on the oil sector in 2018–19 and has already collected over Rs 1,50,000 crore in the nine-month period of the current fiscal.
THE BOTTOM LINE
Even though petrol and diesel prices have been freed from the administered price mechanism, high level of taxes and the invisible control that the Centre exercises on public sector oil companies prevent market forces from taking over auto fuel pricing, keeping customers away from the gains that could have accrued in this market where crude prices have settled at just around $25 a barrel now.
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