Why do we end up paying more for fuel?

The prices of petrol and diesel have been going up ever since oil marketing companies started daily revision. However, it has invited very little attention as the rise is gradual.

Published: 15th September 2017 07:59 AM  |   Last Updated: 15th September 2017 09:27 AM   |  A+A-

A motorist holds a fuel pump at a petrol station. (File photo | Reuters)

By Express News Service

CHENNAI: The prices of petrol and diesel have been going up ever since oil marketing companies started daily revision. However, it has invited very little attention as the rise is gradual.

How much have retail fuel prices gained over the last few months?

While variable state levies like Value Added Tax (VAT) result in different retail prices for petrol and diesel depending on location, India’s consumers have been subjected to an approximate 7.5 to 8 per cent increase in fuel rates since June 16, when daily price revision was introduced. According to data from the Petroleum Ministry, the price of petrol sold by Indian Oil Corporation in New Delhi has gone up from Rs 65.48 on June 16 to Rs 70.39 on September 14. Diesel, for its part, has increased in retail value from Rs 54.49 to Rs 58.74 during the same period. The retail rates of both the fuels hit three-year highs during the last week.

Influence of global crude rate fluctuation…

At the outset, the three-month inflationary run of the fuel rates has dovetailed the increase in global crude prices since June. According to data from the Petroleum Ministry, the cost of crude (Indian basket), has been on a steady rise due to the impact from reduced production and stockpiles in the US, even as the OPEC has revised demand projections upwards. These factors have seen the cost of the Indian basket rise by nearly 10 per cent between June 16 to now — rising from around $48.4 per barrel to $53.83.  However, the actual increase in costs for Indian refineries and OMCs have worked out to around 9 per cent, due to the strengthening of the Indian rupee, which gained around 0.5 per cent on the dollar during this three month period.

How does fluctuation in crude rates affect Indian retail rates?

While it seems that retail rates have actually risen slower than crude prices since June, the method by which retail rates are calculated in India actually bridges this gap. India calculates its price revisions based on trade parity pricing (TPP), which is the sum of import parity pricing (IPP) and export parity pricing (EPP), with the former having a weightage of 80 per cent and EPP, 20 per cent. According to sources, the TPP for petrol and diesel went up by slightly more than 7.5 per cent during the last three month period, in line with the rise in retail rates.

The tax factor

India’s rise in petrol prices may be in line with global trends during the last few months. But, they have hit three-year highs when the price of the Indian crude basket has fallen from $109.05 per barrel in June 2014, to $50.64 in August 2017 — a fall of 53.56 per cent. The primary reason for this anomaly is the rampant hikes in excise duties and VAT that the Central and state governments have implemented over the last three years.

Beginning mid-November, 2014, the Central government has hiked excise duty by Rs 12 per litre for petrol and Rs 13.77 for diesel, in tandem with crude prices touching record lows. In fact, when the Indian crude basket touched just $28.12 per barrel in January 2016 (down 74 per cent against June 2014), petrol and diesel prices in Delhi stood around Rs 59 and Rs 44 respectively. State governments have also increased VAT during this period, seeing overall state taxation increased by around 22 per cent and 28 per cent for petrol and diesel between May 2014, and July 2017.

Government’s stand

The Centre brushed aside the possibility of government intervention in reigning in the price rise on Wednesday, pointing out that they have been rising in tandem with global crude trends. He also stated that reducing excise duty is a call “the finance ministry has to take”, adding that the government has to balance developmental needs with consumer aspirations.

In early 2015, the Centre had said that the hikes in excise duties had been taken “in order to fund the ambitious infrastructure development programme of the government”. Experts also point out that the low levels of inflation, vis-a-vis inflation four years ago, might mitigate the effects of the current price rise on consumers’ wallets. 

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