Why you pay two times the price for fuel in India.

Utkarsh Singh
Sep 8, 2018 · 3 min read

INTRODUCTION

There was a time when petrol and diesel cost in the neighbourhood of ₹ 30–45 and this was not more than around 15 years ago. So how did the prices shoot up from ₹30 to ₹80 in 2018? There are many reasons, common logic would assume that fossil fuels being a nonrenewable resource are bound to become more scare and hence their prices will eventually increase, but the fuel prices per barrel have been reducing from $92 in 2012 to $42 in 2017 & in the same time the fuel prices in India have risen from ₹63 in 2013 to ₹78 in 2018 (Prices for Delhi NCR).

This is a staggering reality of our economy, why aren’t we paying a price that reflects the current market trends? Is the government looting us? This study tries to answer some of these questions by understanding the constituents of the price you pay for a litre of fuel.

A BREAKUP OF COSTS INCLUDED IN FUEL PRICES

In March 2014, when the crude oil price was above $ 100 per barrel, the retail price of petrol was Rs. 73.16 per litre in Delhi. In September 2017, when the crude oil price has declined to $ 50 per barrel, the retail price of petrol has remained nearly the same at Rs. 70.30

  1. How is the price of petrol and diesel determined by the Oil Marketing Companies (OMCs)?

The Government deregulated the petrol price in 2010 and the diesel price in 2014. It allowed OMCs ( like Indian Oil Corporation and Bharat Petroleum) to determine the prices of these fuels based on market considerations. The determinants of fuel prices in the Indian context are:

  • International crude oil prices: Crude oil is a raw material in the production of petrol and diesel.
  • Currency exchange rates: If rupee appreciates, it makes import of crude oil cheaper. Hence, the price of fuel should decrease.

The prices were revised fortnightly based on the above factors.

In June 2016, dynamic daily price model was introduced. As per this model, prices began to be revised daily to make it more aligned to the international markets. Hence the prices now more accurately represented the trends in the market.

2. Why is the petrol price high in India despite the decline in international oil prices?

As a matter of fact, the crude oil prices started declining since 2014.

But, the Government increased the taxes on production (excise duty) and sale (VAT) of petrol and diesel over the last two years to increase its revenue, to fund developmental activities like infrastructure.

Petrol and diesel are outside the ambit of GST and hence Excise and VAT are levied on it by the Central Government and the state Government respectively. The VAT rate differs from state to state while the Excise levied by the Centre is uniform across all states.

3. What is the price break-up of petrol price in Delhi?

CONCLUSION

Hence we can conclude by saying that the government levies such high levels of taxes and duties on the fuel prices which are originally a fraction of what the consumer pays. The reason for which are pretty evident,

  • To fuel the developing economy which is always hungry for greater funds and investments
  • To deter users from consuming more of these precious resources and to rely more on public transport.

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