February 28, 2021

Why are fuel prices rising in India?

Diesel and petrol prices hit a record high of Rs 89 per liter in Delhi on Monday and Rs 86.30 per liter in Mumbai on Monday.

The government says global crude oil prices have risen more than 50 percent to $ 63.3 a barrel since October, forcing oil retailers to raise pump prices. However, that is somewhat true. Although crude prices have not yet reached the beginning of last year, Indian consumers are already paying far more than they did last January. Pump prices of two fuels in other countries are reaching pre-epidemic levels, while Indian consumers are expelling many more.

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

Retail petrol and diesel prices are theoretically controlled – or linked to global crude oil prices. That means if crude prices fall mostly from February, retail prices will also fall, and vice versa.

But this does not happen in practice, and often oil price control is a one-way street in India. So, as global prices rise, the resulting increase is passed on to the consumer, who must be more binary for every liter of fuel he consumes – but when the reverse happens and prices fall, the government almost naturally cuts new taxes to benefit consumers who have to pay lower pump prices, expelling what he already pays Whether it is forced to pay, or is forced to spend even more per liter of fuel, it ensures additional revenue.

The main beneficiary in reducing price control is the government. Consumers are a clear loss, just like fuel retailers.

At the start of last year’s corona virus outbreak, when crude prices plummeted, state-owned oil retailers suspended price revisions for 82 days. The first half of this fiscal did not benefit from the fall in crude prices, but then crude prices recovered somewhat, but in the second half faced record high prices, and then the government had the opportunity to use it to raise taxes on petrol and diesel.

Change in prices

Why is the price of crude oil rising now?

Prices plummeted in April 2020 after the epidemic spread around the world, with demand declining. But as economies ease travel restrictions and increase industrial production, global demand improves and prices recover.

Brent crude, which traded at about $ 40 a barrel between June and October, began to rise in November, and the global release of the Covid-19 vaccine has surpassed $ 60 a barrel.

Controlled crude production amid rising demand is another key factor in raising oil prices, with Saudi Arabia cutting its daily production by 1 million barrels a day to 8.125 million barrels a day in February and March.

N Join Now: Express explained telegraph channel

What is the impact of taxes on the retail price of automotive fuels?

At the beginning of 2020, the central government raised the excise duty on petrol to Rs 39.98 per liter and the excise duty on diesel to Rs 11.83 per liter. Period of increase in revenue as economic activity declines due to epidemic.

Many states have raised sales taxes on petrol and diesel to boost their revenues. The Delhi government has raised the value-added tax on petrol from 27 per cent to 30 per cent. It raised the VAT on diesel from 16.75 per cent to 30 per cent in May, but changed it to 16.75 per cent in July.

At present, the state and central taxes are about 180 per cent of the base price of petrol and 141 per cent of the base price of diesel in Delhi. Industry analysts predict that the central excise duty will be reduced, but prices have reached record levels, but Petroleum and Natural Gas Minister Dharmendra Pradhan recently told parliament that the government is not currently considering any plans to reduce excise duty rates. In comparison, the tax on fuels as a percentage of pump prices was 65 percent of retail prices in Germany and Italy, 62 percent in the United Kingdom, 45 percent in Japan, and 20 percent in the United States.

By sharply raising excise taxes in the wake of falling global oil prices, the government has practically controlled the price of automotive fuels, increasing any savings that consumers can make due to lower global prices. While the price of India’s crude basket fell to $ 19 per barrel in January 2020 from $ 64.3 to $ 19 in April 2020, the price of automotive fuel fell from Rs 75.14 to Rs 69.59 in the case of petrol and from Rs 68 to Rs 62.3 in the case. The government keeps profits from lower crude oil prices than sending diesel to consumers.

Besides, oil marketing companies have been adjusting petrol and diesel prices daily for 82 days since March 16, 2020, when international crude oil was at its lowest level. Executives of oil marketing companies later explained that lowering prices in line with international prices would lead to negative margins for oil marketing companies. But the consumer was in a much drier state.

On the other hand, as the average price of crude basket in India has risen from $ 54.8 per barrel in January 2021 to about $ 40 per barrel in June 2020, the government has kept the central taxes high, raising the price of Delhi to Rs.71 per liter, despite shifting the 13.25 per cent sales tax hike to Rs. .70 to Rs.89 and Rs.79.35 respectively.

While oil marketing companies are free to set prices for petrol and diesel on the basis of international prices, the federal tax hike means that consumers do not benefit from lower international prices and end up with falling crude oil prices rising.

How does this situation compare with other countries?

While petrol prices in other countries have hit pre-epidemic levels, India is seeing higher prices since January due to higher state and federal taxes. The average price of Brent crude fell by about 14 per cent during the same period, while the average price in India (Delhi) rose by 13.6 per cent in January. Consumers in the United States, China and Brazil saw average prices fall 7.5 percent, 5.5 percent and 20.6 percent in January, respectively.

How will these hikes affect inflation?

Experts point out that the impact of rising fuel inflation has been offset by lower food inflation, but consumers with higher travel costs are feeling the pinch of higher prices even though overall inflation fell to 4.06 percent in January.

“Rising fuel inflation could pinch consumers who need to travel more to work and have access to cheaper grains,” said Sunil Kumar Sinha, chief economist at India Ratings and Research. He noted that urban people would be more affected by rising fuel prices than rural people – however, the weak monsoon could affect rural India as farmers are forced to rely more on diesel-powered irrigation.