Abrupt Rise In Fuel Prices In India - An Analysis

Petrol and diesel price discussion have always been people's favourite. However, the abrupt rise in fuel prices have led to a boom of questions and opinions about the current government, prior government and oil companies. Hence, this article shall attempt to cover all the possible reasons as to why the fuel prices are rising?

BACKGROUND

Before getting into the reasons for such recent hikes, it is important to know what are the factors that contribute to fuel prices. These are as follows -

• Base Price of the Crude Oil,
• Freight Charges & Processing Charges,
• Excise Duty charged by Central Government &
• Dealer' s Commission,
• Value Added Tax levied by State Government.

In 2010, the prices of petrol were determined by the government and were revised every fortnight. In 2014, the price of diesel was also deregulated and since 2017 prices are being revised on a daily basis. Hence, Public Sector Oil Companies are the ones determining the fuel prices since then. At present, price changes are effected at 6 A.M everyday.

India imports about 82% of the required crude oil for its petroleum products. India mainly imports crude oil from OPEC countries i.e., Iraq, Iran, Kuwait, Saudi Arabia and Venezuela.

The below table shows the petrol price breakup as on Aug 12, 2021 in Kolkata -

*Price Source  - IOCL

WHERE IT ALL STARTED?

Two decades ago, the price of fuel increase/ decrease were directly proportional to the base price per Barrel of Crude Oil. However, today there are multiple factors. These are as listed below -

Issuance of Oil Bonds

Before the deregulation of petrol and diesel prices, oil companies faced huge burden as petrol and diesel costed a fortune internationally ($140, a barrel) as against the low selling price in India.

Instead of issuing fuel subsidies, between 2005 and 2010, the UPA government issued oil bonds totalling to Rs 1.4 lakh crore to counterbalance their losses.

Though the expenditure is carried over to future when bonds are issued, the expense of these instruments does increase the overall debt of the government.

Now the question is How much of these debt have been paid? -

The oil bonds issued in the UPA regime were worth Rs. 1.4 lakh crore out of which Rs. 1.3 lakh crore was inherited by the NDA government when it came to power.Out of the total Rs. 1.3 lakh crore that the government owes the oil companies, only two bonds that have matured and are worth Rs. 3,500 crore have been paid back. Next two bonds mature this year in October and November adding up to Rs 10,000 crore which need to be paid out.

Hence, the rise in fuel prices have been shown as increase in the finance cost of the Government.

COVID awakening

The Country's economy was in distress. The nation was in full lockdown in initial stages which took the nation way backward in terms of economic upgrade. Now,along with reviving the economy to normalcy, the government also had an objective of supporting the people in hard times for which it had to organize certain welfare schemes on a large scale basis. For this, it had to incur a huge cost, which certainly led to increased deficit. After a year of such pandemic, the government tend to recover a portion of such costs incurred with an increase in revenue from fuel.

Increase in Tax/ Duty by Government

Even with the extreme downfall in the international crude oil price, the governments did not revise the prices as per the demand in the market. The Central government had raised excise duty on petrol from Rs 19.98 per litre to Rs 32.9 last year to recoup gain arising from international oil prices plunging to multi-year low. Resultantly, the respective State Government also increased their respective VATs to a certain extant.

Hence, the fuel price we are experiencing now, is the result of high duty/tax being imposed by the Government.

Electrical Vehicle Promotion?

Recently, the Government had been launching and introducing various schemes such as Faster Adoption and Manufacturing of (Hybrid and) Electric Vehicles in India (FAME India) which was launched in 2015. Currently, its Phase-II is under implementation under which the Government has already spent Rs.1,000Crores. Further, the government has also been amending Tax Laws as a means of faster adoption of EV. Hence, these abrupt rises in prices & imposing heavy duty on fuel prices might be one of the step for promotion of Electric Vehicles.

PROSPECTS FOR LOWERING THE PRICES

India recorded a fiscal deficit of 9.3% of GDP in 2020-21, 0.2% lower than the revised estimate of 9.5% of GDP, according to the Controller General of Accounts (CGA). Hence, in order to bring back the economy to stability, the government might not reduce the duty/ taxes in the near future. However, the price may still fall a to a certain level due to a fall in the Crude Prices due to raise in production by the OPEC Countries and increase in COVID Cases again due to which there will be oversupply but less consumption. However, in order to witness a drastic change in the price, the Central Government need to reduce Excise Duty significantly.

IS THERE AN ALTERNATIVE?

Acceptance of EVs

Already the era of EVs have been started a few years back. Elon Musk brought the revolution and now this has drastically also influenced India. Tesla has launched 2-3 electric vehicle models in India. Domestic players such as TATA has also launched the EV versions of its previously launched models which are a hit and already booming the market. Other market participants are on the verge of launching Electric based four wheelers and two wheelers. Hence, such acceptability from the market audience, technological shifts and these price rises are a clear indication that the Country is ready to accept EVs.

Environmental Cause

We all know that Crude Oil is a non-renewable source of energy and vehicles are a large destined consumer of such source. Further, pollution is big factor towards which such factors contribute. Hence, for an environmental cause, we needed to shift to a better source and electricity is a way better option as on today.

For a better use

Shifting the burden of vehicle fuel to other sources was necessary so as to use Oil in better production and increase the capacity of such production without any limiting factor.

Promoting healthy means

Demotion of petrol and diesel is resulting in people adopt healthy means of travelling such as cycling, walking etc. This will definitely result in increased span of human age and a better lifestyle.

Hence, the world is changing and we need to adapt to these changes for a better cause. EV is a better option today and who knows we might get a better alternative tomorrow for a better cause.