Crude oil prices have hit a new high in India, with petrol touching Rs 89 per litre in Delhi on Monday, and diesel reaching a new high of Rs 86.30 per litre in Mumbai. The Modi government claims that with crude oil prices jumping a new level since October, the oil retailers are forced to boost prices. However, this is only one part of the problem as Indians have always been paying high prices for oil even before global crude oil prices went up last year before the pandemic hit.
Why is crude oil costing more in India?
On paper, if global crude oil prices fall, the retail prices expected to come down in India too, and vice versa. But in practice, when global prices shoot up the resultant increase has to be covered by the consumer who has to contribute to every litre of fuel consumed. However, when the prices go down globally, the government involves new taxes and levies to ensure it takes in the extra revenues. Thus, although the consumer should have had the benefit of the lower pump prices, they are forced to pay the same amount or pay more for every litre of fuel. hence, only the government benefits in this price decontrol and both the fuel retailing companies and consumers are at a loss.
Indian Express reported, “Early into the novel coronavirus pandemic last year, when crude prices crashed, the state-owned oil retailers stopped price revisions for a record 82 days. The consumer was subsequently hit by a double whammy of sorts — not benefitting from the fall in crude prices in the first half of this fiscal, and then facing record-high prices in the second half even as crude prices partially recovered, with the government using the opportunity to raise taxes on petrol and diesel.”
Why are crude oil prices rising now?
Although prices sank in April 2020 with a fall in demand, currently with travel resurging and factory outputs going up the global demand has improved, and prices have been recovering.
Selling at about $40 per barrel between June and October, Brent Crude started to shoot up in November and has gone past the $60 per barrel mark as the global movement of COVID-19 vaccines take place. With Saudi Arabia voluntarily reducing its daily output from 1 million barrels per day to 8.125 million barrels per day through February and March, the controlled production of crude oil amidst the high demand has also contributed to high prices.
What is the impact of taxes on retail prices of auto fuels?
The central excise duty on petrol was hiked from Rs 19.98 per litre to Rs 32.98 per litre in 2020 by the Modi government. Further, the excise duty on diesel shot up to Rs 31.83 per litre from Rs 15.83 over the same period to gain extra revenues to recover the economic loss in the pandemic. The Delhi government has raised the Value-added Tax on petrol from 27 per cent to 30 per cent. Diesel was also raised to a value of 30 per cent but was brought back to its original rate of around 16.75%
In India, state and central taxes amount to around 180 per cent of the base price of petrol and 141 per cent of the base price of diesel in Delhi. In comparison, taxes on fuels as a percentage of pump prices was around 65 per cent of the retail price in Germany and Italy, 62 per cent in the United Kingdom, 45 per cent in Japan, and around 20 per cent in the United States.
Thus, the government has been holding on to most of the gains from lower crude oil prices rather than the consumer benefitting. This was witnessed when India’s crude basket fell from $64.3 per barrel in January 2020 to $19 in April 2020, the price of auto fuels fell only marginally from Rs 75.14 to Rs 69.59 in the case of petrol and Rs 68 to Rs 62.3 for diesel.
When the pandemic had kicked in the oil marketing companies had stopped daily revisions of petrol and diesel prices for 82 days starting March 16, 2020, when the international price of crude oil was at its lowest. However, in India, the average price of the crude basket has risen from $40 per barrel in June 2020 to $54.8 per barrel in January 2021. Thus, the central government has kept the central levies high and as a resultant Delhi witnessed a peak in prices rising from Rs 71 per litre for petrol and about Rs 70 per litre for diesel to Rs 89 and Rs 79.35 respectively, despite the reversal of a 13.25 per cent sales tax hike on the latter.
What is the scenario in other countries?
Due to high state and central taxes, India has seen a high price since January, although other countries are currently hitting the pre-pandemic price. The average price of petrol in India (Delhi) in January was up 13.6 per cent compared to the year-ago period, even as the average price of Brent crude was down about 14 per cent in the same period. Consumers in the US, China, and Brazil paid average prices in January that were 7.5 per cent, 5.5 per cent, and 20.6 per cent lower.
How will these hikes impact inflation?
“Rising fuel inflation may pinch consumers who have to travel further for work and have access to affordable cereals etc,” said Sunil Kumar Sinha, principal economist at India Ratings and Research.
According to Sinha, the urban population will be more affected by these high crude oil prices than the rural community. He further adds that a bad monsoon might impact rural India, as they will be forced to shift towards diesel-powered irrigation.
Although experts sense that the declining food inflation has counterbalanced the impact of rising fuel inflation but consumers with greater expenditure on travel are paying the brunt of higher prices despite overall inflation being down to 4.06 per cent in January.