Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Why are Petrol, Diesel prices rising?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Impact of fuel prices on inflation

Mains level : Global oil price dynamics

Diesel and petrol prices have hit record highs across the country.

Govt explanation

  • The government reasons that global crude oil prices have risen by more than 50 per cent to over $63.3 per barrel since October, forcing oil retailers to increase pump prices.
  • That, however, is only partly true.
  • Indian consumers are already paying much higher than what they were paying last January, even though crude prices are yet to reach levels of early last year.

Note: Petrol and diesel do not come under the purview of goods and services tax (GST).

Fuel price dynamics in India

  • Retail petrol and diesel prices are in theory decontrolled — or linked to global crude oil prices.
  • It means that if crude prices fall retails prices should come down too, and vice versa.
  • But this does not happen in practice, largely because oil price decontrol is a one-way street in India.
  • When global crude oil prices fall and prices slide, the government slaps fresh taxes and levies to ensure that it rakes in extra revenues.
  • The consumer should have ideally benefited by way of lower pump prices, is forced to either shell out what she’s already paying or spend even more for every litre of fuel.
  • The main beneficiary in this subversion of price decontrol is the government.

Why crude oil prices are rising now?

  • Prices collapsed in April 2020 after the pandemic spread around the world, and demand fell away.
  • But as economies have reduced travel restrictions and factory output has picked up, global demand has improved, and prices have been recovering.
  • The controlled production of crude amid rising demand has been another key factor in boosting oil prices, with Saudi Arabia voluntarily cutting its daily output.

What is the impact of taxes on retail prices of auto fuels?

  • The central government hiked the central excise duty on petrol to Rs 32.98 per litre during the course of last year from Rs 19.98 per litre at the beginning of 2020.
  • It increased the excise duty on diesel to Rs 31.83 per litre from Rs 15.83 over the same period to boost revenues as economic activity fell due to the pandemic.
  • A number of states have also hiked sales tax on petrol and diesel to shore up their revenues.

How much tax do we pay now?

Currently, 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.

How will these hikes impact inflation?

  • Experts note that the impact of rising fuel inflation has been counterbalanced by declining food inflation, but that consumers with greater expenditure on travel are feeling the pinch of higher prices.
  • Rising fuel inflation may pinch consumers who have to travel further for work and have access to affordable cereals etc.
  • The urban population would be more impacted by rising fuel prices than the rural population — however, a weak monsoon may lead to rural India being hit as farmers are forced to rely more on diesel-powered irrigation.
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