Since the global Covid-19 pandemic and ensuing lockdowns, global demand for petroleum products has decreased and large stocks are piling up across refineries and oil tanker vessels on the high seas. The excess supply has led to a drop in global prices. However, prices in India are seeing a substantial increase practically every week. Why is it so?

It is well known that the Middle East accounts for the largest share of petroleum production, followed by other countries such as Russia and USA. India too has some reserves, but domestic production is not adequate to meet domestic demand, and most countries like ours meet the gap through imports from the Middle East.

Major petroleum producing countries, who hold more than 75% of proven global crude oil reserves, formed the Organization of Petroleum Exporting Countries (OPEC) in 1960. The intention behind OPEC was to establish control over supply and pricing of petroleum. To this day, OPEC plays a vital role in the working of the international petroleum market. OPEC’s key objective is to stabilize revenues for petroleum producing nations, provide a regular, reliable, efficient supply to consuming nations and fair returns to industry investors. Accordingly, it has developed its price band mechanism and also engages with other non-OPEC petroleum-producing countries.

Petroleum Market and Price Position in India

Since imports account for nearly 84% of India’s petroleum consumption, any change in the global prices significantly impacts the prices in the country. India is one of the top ten countries with highest petroleum prices. Three oil marketing Government owned companies, Indian Oil, Hindustan Petroleum and Bharat Petroleum have monopoly over the Indian petrol market.

The following is the structure of petroleum prices in India –

Fuel component52% (includes cost of refining; varies as per international prices)
Customs Duty4% (approx.)
Excise DutyVaries as per decisions of Central Government
Sales VATVaries as per decisions of State Governments
Dealer Commission2%

Heavy taxes on petroleum generates huge amount of revenue for the government, and hence cutting down fuel prices is a tough decision for both, central and state governments. The everyday fluctuations in prices is due to the Dynamic Pricing System which reflects fluctuations in the global market. Previously, petroleum prices used to be revised every fortnight, however since 16th June 2017 onwards, prices are being revised daily at 6.00 am.

India shifted from the Administrative Price Mechanism (APM) to Dynamic Pricing System (DPS) to ensure price decontrol which further ensures that the benefit of even the smallest change in international petroleum prices can be put into effect.

One of the most important factors leading to increase in fuel prices are taxes – the VAT levied by states and customs and excise duty by the centre. Since 2014, the government has been increasing excise duty despite a fall in global prices, leading to an increase in the central government’s revenue. As of now, fuel has been kept outside the purview of Goods and Services Tax (GST), and the decision of the GST Council is pending. The present maximum upper limit of GST is 28%, hence even if petroleum products are placed in the highest bracket of the GST, there will still be a considerable reduction in their prices.

Given that international petroleum prices are quoted in USD, shifts in the value of the dollar i.e. the strength of the domestic currency against the dollar also impacts domestic prices.

Currently, domestic prices are determined by the price swings in the Singapore petroleum market. Petroleum companies simply take the price of petrol in Singapore market, apply the rupee-dollar exchange rates to that price, add other costs such as freight, import duties and costs of refining, and finally add in their profits to arrive at their price. Then, taxes are added to this price, and we get the final price in the domestic market.

Present Scenario in India

Usually, consumers pay more when international prices increase. However, when international prices go down, the government increases taxes to ensure increase in revenues, without passing on the benefit to the consumers. The key beneficiary here is the government, and the consumer is a clear loser.

By end of March 2020, the demand for petroleum slumped as countries went into lockdowns due to the Covid-19 pandemic, leading to a crash in international prices. Prices continued to be low even as countries began to lift lockdowns, but in India, at this time, the central government hiked excise duty on petroleum twice.

In February 2020, central and state governments were collecting around 107% taxes (excise duties and VAT) on the base price of petrol, and 69% taxes on the base price of diesel. These proportions increased to 134% (petrol) and 88% (diesel) in March 2020. As per estimates by CARE ratings, by May 2020, the government had began collecting 260% taxes on petrol and 256% taxes on diesel.

As such, petroleum prices in European countries are only 60% to 65% of petroleum prices in India. As per the officials of Finance Ministry, the government decided to raise petroleum duties to mitigate the tight fiscal situation caused by the large and unforeseen out-of-budget expenditures carried out in the first half of 2020. These expenditures have been incurred largely to fight the Covid-19 pandemic and manage ensuing lockdowns and impacts on the economy. Also, border tensions with Pakistan and China are leading to more spending on defence equipment and deployment, adding to financial issues.

In such a scenario, despite fall in global petroleum prices, it is unlikely in the near future that petroleum prices will reduce in India.

Ajit Phadke

Ajit Phadke, B.Com.(Hons), M.B.A., LL.B, has been operating as a freelance industrial consultant for 35 years and specialises in 100% EOU / Export / Import, Foreign Exchange Rules and Industrial Regulations.

The views and opinions expressed in the article are those of the authors and do not necessarily reflect the official policy or position of The Tilak Chronicle and TTC Media Pvt Ltd.

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