The Echo-nomist

The petrol and diesel prices are ROCKETING in India. India wants to know why. In this article, I’m going to explain why the prices are rising in brief.

First, let’s talk about how India’s public sector oil marketing companies (ex- Indian Oil, BPCL etc. ) price diesel and petrol. They follow Trade Parity Pricing aka TPP. As the name suggests, it’s based on the relation between how much we import and how much we export. So the oil pricing is based on the price for petrol and diesel prevailing in the international markets, which assumes that 80% of the petrol and diesel is imported and 20% is exported. After this, the dollars are converted into rupees. The Indian rupee is weaker than the US dollar. Further add to this the cost of inland freight, marketing costs and margins charged by the oil companies, the dealer commission and last (but definitely not least) TAXES.

GST is not applicable on petrol and diesel. But what is applicable to them is VAT or Value Added Tax. Both, the central and state, governments know they can always depend on taxes on petrol and diesel to generate revenue. This is for two reasons, they control the tax rate and it’s almost a constant demand. If you have a car you won’t stop providing it fuel just because the prices are so high. In the long run you will fill your car with fuel and use it.

Do you remember the crash in crude oil prices at the beginning of the pandemic? The centre increased the excise duty on petrol and diesel by Rs. 13-16 a litre. A lot of states also increased their VAT. The consumers didn’t benefit at all from NEGATIVE rates of crude oil globally.

Now the global prices are rising. The price of crude oil has risen from 40$ a barrel to $63.49 at the prospect of economic recovery. Meanwhile, Saudi Arabia voluntarily cut it’s daily output by 1 million barrels through Feb and March 2021 to boost oil prices (at least someone is getting what they want). However, the government is not in a position to reduce the tax rates. In turn, it’s the consumers who are suffering.

According to Union Petroleum and Natural Gas and Steel Minister, Dharmendra Pradhan, there are two reasons for the rise in fuel prices. “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” he reported to ANI. He further stated, “Another reason is COVID. We have to do various development work. For this, Centre and state governments collect the tax. Spending on development work will generate more jobs.”

We might even see a hike in the price of vegetables and other essential items due to increase in transportation costs cause of fuel prices. It’s a vicious cycle and we’re stuck in it.