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Following article on "Why Petrol Getting Costlier In India? "

Petrol and diesel prices were consecutively increased for the 11^th consecutive day on May 25, 2018 and soared to the record high at INR 77.47 and INR 68.53 respectively. The highest rate of petrol was in Mumbai at INR 85.29 per litre followed by INR 80.42 in Chennai and INR 82.12 in Kolkata. Petrol prices vary in different cities due to different rate of Value Added Tax (VAT) applied by different states.  

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Factors behind Petrol Price

Fuel prices are primarily dependent on two factors: price of crude oil in the international market and the taxes levied by the central and state governments. Since the 80% of crude requirement is imported from the international market, in addition to the international crude price, the appreciation or depreciation of Rupee also affects the price of petrol and diesel accordingly. The depreciation of Rupee makes the imports expensive while the appreciation makes imports cheaper.

The current depreciation of Rupee against Dollar and rising international crude prices are also putting upward pressure on the prices of petrol.  Other factors affecting the price of petrol are refining cost, central taxes and state taxes.

International Crude Price

The international crude price has increased by 7.4% in the month of May due robust demand combined with Oil Producing and Exporting Countries (OPEC) related production cuts. Apart from this, the turmoil in Venezuela has also affected the domestic oil production in the country. The US sanctions on Iran had also helped in pushing the oil prices upwards. Currently, the Brent crude is trading at around USD80 per barrel.  

However, crude prices are likely to fall in coming days as OPEC and Russia are considering increasing the output by one million barrel per day to compensate the effects of sanctions on Iran and turmoil in Venezuela.

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Taxes On Petrol and Diesel

The taxes on petrol and diesel have been increased nine times between November 2014 and January 2016 when the international crude prices were hovering lower. Consequently, the petrol is currently taxed little over 100% (including state taxes) while tax on diesel is around 66.48%.

The price of petrol is currently at nearly same level as it was in 2014, despite relatively lower crude prices. This is because of high rate of taxes on petrol and diesel. Below table provides a comparative analysis of break-up of petrol prices in Delhi in 2014 and 2018 –

*Price charged to dealers include the refining cost.

In 2014, the price paid by dealer to the oil marketing companies for one litre of petrol was INR47.18 while currently, it is INR37.19. Thus, now the dealer is paying less to the oil companies than in 2014 but still public is paying more because of high rate of tax. The difference between the price paid by dealer and the retail price is taxation plus dealers’ commission. This is the reason why despite lower international crude prices, retail petrol price is similar to that of 2014.

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However, since the next year is an election year, government may bring down the excise duty and VAT on petrol and diesel to calm down the prices. Also, OPEC and Russia are planning to improve the supply of crude to moderate the prices. If Rupee improves vis-vis dollar in coming days, we may see the moderation of retail prices in coming days. And last but not the least, if the governments show resolve to include petrol and diesel in GST, the price may further reduce as the peak rate of GST is 28%. However, because of the fear of loss of revenue, states are very reluctant on bringing petrol and diesel in the ambit of GST.     

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