Why petrol could soon cost Rs 100 a litre

Amitabh Tiwari
·5 min read

Petrol prices in India have touched an all-time high after state-owned oil marketing companies (OMCs) hiked rates following a spike in global crude oil prices.

Crude oil prices have breached the $50 mark after OPEC and Russia agreed to roll over production cuts.

In Delhi, petrol costs Rs 84.20 per litre and diesel is priced at Rs 74.38.

In Mumbai, petrol comes for Rs 90.83 a litre and diesel for Rs 81.07 (prices as on 7th January 2021).

This is the highest ever price of petrol in Delhi, while diesel is at record high in Mumbai.

The Narendra Modi government had increased the special excise duty on petrol and diesel by Rs 3 per litre each, taking advantage of the decline in global crude oil prices by 30% during March 2020 in the aftermath of the pandemic.

This was expected to fetch additional Rs 40,000 crore to the government and come in handy in a tough year.

The Modi dispensation has used low crude oil prices to shore up government revenue without passing on the full benefits to end consumers.

Within seven months of Modi taking oath in May 2014, crude oil prices fell by half from $105/bbl levels to $55/bbl levels during his first tenure.

Even during his second term prices continue to remain low and he has continued with the policy of milking the end consumer.

Under the Modi regime excise duty on petrol has more than doubled while diesel has witnessed an increase of more than 400%. This is akin to cheating customers, prices should have been decreased in line with decline in global crude oil prices.

Excise Duty on Fuel in Modi and pre Modi era (Source: INC Tweet)

As a result of the recent hikes, petrol price in Delhi is up by 17% compared to May 2014 when Modi stormed to power.

During this period, the price charged to dealers by OMCs (after taking into account the depreciation of the rupee) has declined by 41%.

Excise duty (central government collection) is up by 217%. State government of Delhi not to be left behind has increased VAT by 62%. Dealer commissions have almost doubled during this period.

Price build up of petrol in Delhi (Source: www.iocl.com)

Taxes (excise duty plus VAT) which accounted for just 31% of the total selling price in 2014 now account for 62%.

Taxes on petrol have simply doubled during the last six years. It seems as if it is a ‘sin product’, like alcohol or cigarette.

If the Modi government had fully passed on the benefits of decline in crude prices to consumers, dealer commissions remained the same and Delhi Chief Minister Arvind Kejriwal had not increased the VAT, then petrol prices in Delhi would be Rs 19/ltr lower than current prices at Rs 52.03/ltr.

The policy of the Union government has also been followed by states which have also increased the VAT (value added tax) on petrol. Everybody in the value chain is making hay while the sun shines.

While consumers have been taken for a ride, low crude oil prices and hike in excise duty have certainly benefited our economy.

Our crude import bill has declined and excise duty collections on fuels have more than doubled.

Excise duty collection & crude import bill (Source: PPAC www.politicalbaba.com)

Low crude prices have helped the government deregulate diesel prices and cap subsidy on LPG. This has improved the financial health of state-owned oil marketing companies.

On an aggregate, Rs 15-18 lakh crore have been savings/additional receipts to the Modi government on account of low crude oil prices in the last five-six years.

The higher excise duty receipts have helped GoI maintain its fiscal deficit targets.

If excise duty was not increased taking advantage of low crude oil price scenario, then fiscal deficit as a percentage of GDP would have been 0.25-0.5 percentage points higher than budgeted for the last five years.

These windfall gains have been utilised for infrastructure spending, increase in NREGA allotment and other welfare schemes.

At a time when consumption, which is one of the key levers of our growth story, needs to be revived, and incomes have been hit during the pandemic, the government could have been better off by passing at least some of the benefits of decline in crude prices to the consumer.

However, the government which is struggling to meet the revenue targets due to slow down and now the pandemic, has chosen the easy path.

With global prices increasing, the petrol price may touch the century mark in Mumbai soon.

Considering the fact that fuel pricing is a sensitive topic in India, and also has an impact on inflation due to its high weight in the basket, the government may need to step in and reduce the excise duty to give some relief to consumers, thus impacting its revenues.

The other option the government has is to ask OMCs to stop the hikes for some time, after all it owns a majority stake in these PSUs. However, it may not send a good signal to the market, more so, when BPCL disinvestment is under process.

With state elections due in five states in three months, higher fuel prices is the last thing which the ruling Bharatiya Janata Party would want at this stage.