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Thursday, February 25, 2021

Petrol, diesel price hike: Here’s why fuel rates are at a record high in India

Taxes (Both central and State) add to the rising crude oil prices. The price-sensitive Indian consumers are getting adversely affected by rising petroleum product prices. Yet the governments are not willing to cut down on the taxes. Why?

Automobile fuel prices have reached a record high in the past few weeks. Over the past 10 days and more, petrol prices have spiked by nearly Rs 3.60 while diesel rates have gone up by Rs 4.18 across the entire country. “There are two main reasons for the fuel price rise. The international market has reduced fuel production and manufacturing countries are producing less fuel to gain more profit. This is making the consumer countries suffer,” the Union Petroleum Minister Dharmendra Pradhan said. He might have given us two major reasons for the rise, however, there’s always more to this scenario.

Why are petrol, diesel prices rising in India?

In a country like India, petrol and diesel prices are mainly dependent on international market rates. Now, if the rates increase drastically in the international markets, then it is almost absolutely likely that it will rise in India as well and vice versa. According to various reports, crude oil prices had collapsed in April 2020 due to a fall in demand owing to the outbreak of the COVID-19 pandemic. However, the rates were increased to USD 63.49 for Brent crude from USD 40 soon after a vaccine rollout took place. During the same time, Saudi Arabia, one of the major exporters of crude oil, also reduced its daily output by at least one million barrels in order to boost oil prices in the international markets. This was done to recover from the massive loses incurred because of the COVID-19 pandemic. While in other countries across the world fuel prices are gradually coming back to pre-pandemic levels, in India since January 2021, they have seen a record spike.

Petrol-diesel price hike
Source: PPAC, Trading Economics, Statista

But, why are crude oil prices rising now?

As we already know, crude oil prices collapsed in April last year as the pandemic hit countries across the globe. The demand began decreasing with that. But now as countries begin opening their borders, travel restrictions lifted, the demand globally is on a rise with the prices slowly recovering. As per reports, Brent crude, which was trading at about $40 per barrel between June and October 2020, began rising in November and has reached past the $60 per barrel mark as Coronavirus vaccine rollouts are being increased. There has been a controlled production of crude oil amid rising demand for it, which, in turn, has been a major factor in boosting oil prices. However, Union Petroleum Minister Dharmendra Pradhan has urged the Organization of the Petroleum Exporting Countries (OPEC) members to “stop regulating crude oil production” and ease rates. He has stated that there is an “urgent need to allow consumption-led recovery that has just taken roots in several emerging economies, noting that the rising fuel prices are hurting the fragile global economic recovery”.
“In the collective interests of both producing and consuming countries, prices should be reasonable and responsible. The price-sensitive Indian consumers are getting adversely affected by rising petroleum product prices,” he said. “It also affects demand growth, which could potentially impact the delicate aspirational economic growth trajectory not just in India but in other developing countries as well,” he added, according to a Jagran.com report.

Petrol, diesel price hike
Source: Medium.com/Indian National Congress

Why the Central government isn’t cutting taxes to reduce rates of oil prices?

The fuel prices are definitely cutting a hole in the pockets of middle-class consumers. Above that, the Central government had made it clear that it has no intention of cutting excise duty on crude oil that would thus provide relief to consumers. Speaking at the Rajya Sabha, Pradhan earlier this month had said that the Centre and state governments rely heavily on collections from taxes on crude oil “for meeting their developmental and welfare priorities”. “They need some resources… (and) this (taxing petrol and diesel) has been a proven and substantial route by all the governments, whether the state governments or the central government,” he had said. “Both the states and the central government are raising taxes according to their developmental needs,” he added. While taxes make up for a whopping 61 per cent of the retail petrol price, they make over 56 per cent of diesel pump rates. Earlier, the government had reduced the excise duty on petrol and diesel by Rs 2 per litre on October 4, 2017, and once again by Rs 1.5 on October 5, 2018. It had also reduced the VAT on request from states and union territories.

The government getting benefits from such increases has always been a one-way street. When they hiked the excise duty while prices of oil fell across the world, they basically controlled the price of auto fuels thus gaining from the savings that consumers might have gotten because of lower prices. Even though 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 decreased marginally from Rs 75.14 to Rs 69.59 in the case of petrol and Rs 68 to Rs 62.3 in the case of diesel. Basically, the government had complete control over what it gained instead of making it easier for its consumers.

Which are the states that have provided relief to their consumers by cutting taxes?

Currently, four states have cut taxes on petrol and diesel in recent days. To provide some amount of relief to consumers, state taxes have been cut in West Bengal, Assam, Rajasthan and Meghalaya. Poll-bound West Bengal cut the value-added tax on petrol and diesel by Re 1 per litre on February 21. Among all the four states, Meghalaya has announced the largest cut of Rs 7.40 a litre on petrol and Rs 7.10 on diesel. Assam, which is also getting ready for elections in 2021, withdrew the additional tax of Rs 5 a litre that had earlier been imposed to fund its fight against the COVID-19 pandemic. Rajasthan was the first state that went for a VAT cut — from 38 per cent to 36 per cent on January 29, 2021. After the tax cuts, petrol was priced at Rs 91.78 in Kolkata, Rs 86.87 Shillong, Rs 87.24 in Guwahati and Rs 97.10 in Jaipur on February 22. While diesel retails for Rs 84.56 in Kolkata, Rs 80.24 in Shillong, Rs 81.49 in Guwahati and Rs 89.44 in Jaipur, according to several news reports.

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