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FUEL PRICES IN INDIA
Read more on - Polity | Economy | Schemes | S&T | Environment
- Fuel prices in India: Many ingredients go into determining fuel prices in India. Prices of petrol and diesel in India are not determined by the actual costs incurred by PSU refiners such as Indian Oil, HPCL and BPCL on crude oil sourcing, refining and marketing. Rather, a formula — trade parity price (TPP) — is used to price these products.
- What is the formula: It assumes that 80 per cent of petrol and diesel is imported into India and 20 per cent is exported. So, petrol and diesel prices in India are determined based on prices of these fuels in the international market — and not on the basis of crude oil prices. Now, while international petrol and diesel prices generally move in line with crude oil prices, it need not always be the case, given that demand and supply dynamics could be different. It doesn’t help that global crude prices have been rising and now trade about $50 a barrel, up from the Covid-induced low of about $20 in April 2020.
- Trade Parity Price (TPP),consists of 80% of Import Parity Price (IPP) and 20% of Export Parity Price (EPP)
- IPP represents the price that importers would pay, in case of actual import of product at the respective Indian ports and includes the elements of Free on Board (FOB) price + Ocean Freight + Insurance + Custom Duties + Port Dues, etc.
- EPP represents the price which Oil companies would realize on export of petroleum products. This includes FOB price + Advance License benefit or ALB for duty free import of crude Oil, pursuant to export of refined products.
- After abolition of Customs Duty on Crude oil, the ALB is currently zero. To summarise, while international Crude Oil prices do play a significant role, local fuel prices are derived from various other elements too.
- Calculations: The TPP in dollars is converted to rupees. Then come other costs and margins of the oil companies, dealer commission and taxes. From mid-June 2017, the pricing of petrol and diesel is done through a ‘daily pricing’ mechanism, based on a 15-day rolling average international rate. So, time lag has an effect too. The weakening of the rupee against the dollar over the years has added to the fuel’s cost.
- Taxes: Then come the taxes. Petrol and diesel are the government’s cash cows. During the crude crash earlier 2020, a cash-strapped Centre raised excise duty on petrol and diesel by ?13-16 a litre; many States too increased their sales tax/VAT. But when oil prices started rising, the taxes were not rolled back, fuel prices increased, and customers bore the brunt. Taxes now account for more than 65 per cent of the fuels’ price.
- Situation: India imports most of its oil needs but is more than self-sufficient in petrol and diesel production. So, the trade parity pricing mechanism has often been criticised, especially since petrol and diesel are ‘decontrolled’ fuels. The complaints include allegations of cartelisation with the three PSU oil companies charging nearly the same price, despite different cost structures and efficiencies. Transparent pricing, based on market principles, will likely help consumers more.
- Inflation: Higher petrol and diesel prices don’t just mean higher personal transport costs. They could also cause a price spike in a host of goods and services, given that these fuels play a big part in running the economy’s wheels. Inflation has already reared its head again.
- Basket of Hope: The average price of India’s crude basket has increased to $54.8 per barrel in January 2021 from about $40 per barrel in June 2020, and the government has kept central levies high, leading to prices rising. While the oil marketing companies are notionally free to set prices for petrol and diesel based on international prices, hikes in central levies nullify any gains.
- Other countries: The price of petrol is hitting pre-pandemic levels in other countries, but India has been seeing record high prices since January due to high state and central taxes. The average price of petrol in India (Delhi) in January was up 13.6 per cent compared to the year-ago period, while average price of Brent crude was down about 14 per cent. And consumers in the US, China, and Brazil paid average prices in January that were 7.5 per cent, 5.5 per cent, and 20.6 per cent lower than the year-ago period.
- In Union Budget 2021, the Finance Minister proposed an Agriculture Infrastructure and Development Cess (AIDC),of Rs 2.5 per litre on petrol and Rs 4 per litre on diesel.
- The new cess has been introduced to boost agriculture infrastructure.
- The AIDC, it is claimed, won’t burden the customers because the government is reducing the Basic Excise Duty and Special Additional Excise Duty (SAED).
- So unbranded Petrol and Diesel will attract basic excise duty of only Rs 1.4 and Rs 1.8 per litre, resp. (govt claim)
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