Why is the price of petrol and diesel so high in India?

“Petrol Prices” by Images_of_Money is licensed under CC BY 2.0

Petrol prices have surpassed Rs 100 per liter in some Indian cities in recent weeks, contributing to inflation and putting strain on household budgets. While rising worldwide fuel prices can explain some of the increase in petrol and diesel prices, the high incidence of taxes on these items also plays a key role. Another issue is the two-month moratorium on fuel price increases during the election months of March and April. The government has so far avoided cutting taxes on petroleum goods, despite the Monetary Policy Committee (MPC), led by the governor of the Reserve Bank of India, urging the Centre and states to do so in order to relieve the economy’s inflationary pressures. Since May 4, fuel prices have risen 24 times — eight times in June alone. Petrol prices in seven states and union territories have surpassed Rs 100 per liter: Rajasthan, Madhya Pradesh, Maharashtra, Andhra Pradesh, Telangana, Ladakh, and Karnataka. While Mumbai became the first metropolis in the country to sell fuel at Rs 100 on May 29, Bhopal was the first state capital to do so on May 12. Petrol cost Rs 102.88 in Mumbai and Rs 104.91 in Bhopal as of June 17.

India imports the majority of its domestic oil requirements. While international oil prices have risen considerably in the last six months, the high imposition of municipal taxes is a major cause for the high selling price of gasoline. The Union government imposes excise duty and a cess on fuel, while states impose a value-added tax (VAT). At the moment, taxes account for 58% of the retail selling price of gasoline and roughly 52% of the retail selling price of diesel. This means that if the price of petrol is Rs 100 per liter, the government and state governments’ taxes total Rs 58. The Union government’s excise charge is approximately Rs 32-33, while the remainder is VAT levied by the states. The last time fuel prices in India rose was between 2010-11 and 2013-14, under the United Progressive Alliance (UPA) government’s tenure. However, at the time, the jump was primarily due to a dramatic rise in worldwide crude prices, which had reached all-time highs. During those years, the average price of oil barrels had above $100. Despite this, the retail price of petrol in Indian cities has stayed below Rs 90 per liter due to the low level of taxes in place. During that time, the excise charged on petrol was as low as Rs 10.

Even with growing worldwide costs, the central government and states have been hesitant to cut rates because these levies are an important source of revenue. Over the last six months, both factions have passed the blame on fuel tax reductions, refusing to make the first move to reduce taxes and it is not difficult to see why. The government collected Rs 3.89 lakh crore in excise duty collections in 2020-21, a 62% increase from Rs 2.39 lakh crore collected in 2019-20, the majority of which is projected to be from petrol taxes and cess. This increase in tax collections occurred despite the fact that petroleum usage fell by 9% in 2020-21 due to transportation restrictions caused by the Covid-19 pandemic. It can be ascribed to a significant increase in petroleum product taxes in May 2020. Fuel inflation in India was 11.6 percent in May, up from 7.9 percent in April and 4.5 percent in March. Concerns have also been raised that an increase in fuel prices will have a negative impact on discretionary spending, as people cut back to accommodate rising fuel expenses.