Why Are Prices of Diesel and Petrol not Decreasing, when Crude -Oil prices are falling drastically?

On June 8th, India prepared to lift the lockdown imposed on its citizens due to the Coronavirus.

Around this time, Oil companies controlled by Union Government started hiking both petrol and diesel prices. From June 7th, fuel prices were hiked consecutively for 22 days.

In Delhi, the price of petrol was increased by 13%, and the price of diesel was increased by 16%, – during this period alone.

Fuel prices were hiked to such extent that in some states diesel was costlier than petrol since each state in India has different fuel prices (state-specific taxes).

The peculiar thing about this price hike was that even though Crude Oil prices fell drastically from $71 per barrel at the beginning of Financial year 2019-’20, to $39.89 as of June 2020, a price drop of more than 42%.

Falling Crude Oil prices, theoretically speaking, should be beneficial for the public as it should mean a decrease in fuel prices. But in practice, consumers rarely get these benefits.

According to The Scroll, “The Indian crude basket is an index consisting of different crude grades according to which – in theory – retail price of petrol and diesel is supposed to be benchmarked. In practice, however, this benchmarking only works if crude prices are going up.”

A perfect example would be recent fuel price hikes in our nation.

But what was the reason behind this immediate hike?

In April the price of Indian basket of Crude Oil went below $20 per barrel. But since then the price of oil has risen. It averaged around $30 per barrel in May, and on June 28th it stood at $40.83.

So, the price of Crude oil has almost doubled, as lockdown is eased and International demand for Crude has picked pace.

But this is not the sole reason for the hike. The other reason would be taxes.

The excise duty on Petrol and Diesel was hiked by the Union government by a record Rs.10 per litre and Rs.13 per litre respectively, in the month of May.

Meanwhile, 13 states announced an increase in their fuel taxes.

Governments use this pattern of excessive taxation to provide themselves a steady profit.

This absurd system of taxation makes survival difficult for the public. For example, In Delhi, Central excise and State VAT (Value Added Tax) makes up for two-thirds of what a person pays at the petrol pump.

Basically, the entire fall in oil price has been captured by the Union Government without passing the benefits to the consumers. As a result, India has one of the highest tax rates on fuel, as compared to other countries.

But why is the government so keen on taxation of fuel?

This is because of the sharp fall in the revenues collected from GST (Goods and Services Tax) which has been a blow to both the states and the Union Government. Revenues collected from GST are 41% lower in the first quarter of 2020-’21, as compared to the same period of the previous year.

In 2017-’18, the gross tax revenue collected by the government rose from 9.98% of the GDP (Gross Domestic Product) to 11.22%. The main reason for this increase was a hike in taxes on petrol and diesel, by the government (primarily excise duty).

The money earned through taxes imposed on fuel stood at ₹46,386 crores in the financial year 2013-’14.

In 2017-’18, this leaped to ₹2,23,922 crore.

Even though the COVID19 forced the government to increase the excise duties on petrol and diesel to some extent, the gross-tax revenue had still fallen to 9.88% of the GDP, in the financial year 2019-’20, owing to the ill-implemented GST and the aftermath of demonetization. Hence, even if India wasn’t hit by COVID19, the government would still have had increased the excise duty on diesel and petrol, though not so drastically.

Earlier in January, Former Finance Secretary, Subhas Chandra Garg, pointed out that India might miss tax collection target for financial year 2019-’20 by nearly Rs. 2.5 lakh crore.

Drawing attention to the “grim” situation of underlying tax revenue situation, he further said, that it is the right time to initiate much-needed reforms in the taxation structure.

                            – Aanandita Singh

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