Trends about Petrol and Diesel Prices in India - Some Thoughts

No small matter, this

Much noise is being made on the rising petrol and diesel prices in India. Is it worth the shouting matches that are being indulged in?

When one looks at the petrol and diesel prices data from the Petroleum Pricing and Analysis Cell under the Ministry of Petroleum and Natural Gas, Government of India, and starts doing some basic analysis, interesting trends start to emerge.

As against the petrol price increments that were taking place between April 2007 and April 2014, the price of petrol has been under control, lower than what it could have been if the trends had continued. This can be understood when one sees the trendline based on prices for this period versus the actual prices for the subsequent period till 1 June 2021. It must be noted though that the anomaly could very well be a result of suppression of fuel prices under the UPA for the longest time. Interestingly, the UPA government had removed the market flexibility policy that the previous Vajpayee regime had introduced into the market upon coming to power in 2004. Deregulation for petrol happened only around 2010, subsequent to which sharp increases can be noted.

In contrast, diesel price fluctuations that started with its deregulation has breached the trend for the same period of time. Reasons behind it can be varied. Deregulation that happened in 2014 was followed by several interesting measures in the market that have seen the demand for diesel being brought down. The ongoing electrification of railways creates a big hole in the market, as Railways remains the biggest consumer of diesel in India. Compensation for this resultant dent for its demand may be attempted by increasing prices. 

Also, diesel quality as per the BSVI standards that the oil refineries are now producing has also come at a cost, though one can argue that this is small price compared to the environmental benefit one gains in turn.

Of course, the role of states can never be underestimated in keeping the prices at a high. After all, they earn as much as 40-50 per cent of the retail selling price in the form of taxes and cesses. Sample the following from the PPAC site as the structure of cesses and taxes on petrol prices in Punjab

  • Rs.2050/KL (cess)
  • Rs.0.10 per Litre (Urban Transport Fund)
  • 0.25 per Litre (Special Infrastructure Development Fee)
  • 24.79% VAT+10% additional tax on VAT Rs.1050/KL (cess)
  • Rs.0.10 per Litre (Urban Transport Fund)
  • 0.25 per Litre (Special Infrastructure Development Fee)
  • 15.94% VAT+10% additional tax on VAT

Similarly, look at diesel price taxation scenario in Kerala.

  • 22.76% sales tax
  • Rs.1/litre additional sales tax
  • 1% cess

Gujarat spares us with a little less complexity.

  • 20.1% VAT
  • 4% Cess on Town Rate & VAT

Delhi's diesel charging is absolutely perplexing, driven of course by Supreme Court's green cess order meant to reduce its consumption in the capital city.

  • Rs.250/KL air ambience charges
  • 16.75% VAT
  • 1% green cess

One thing must be noted. States may talk that they welcome GST to reduce fuel prices; however, when push came to shove, the topic was not even touched upon in the 43rd GST council meeting in May 2021. Who will, after all, kill the golden goose that lays eggs?

To be fair to states, with the introduction of the GST, many have lost their ability to raise revenues on their own beyond fuel and alcohol. Land related revenues are not a primary source of income for most states now, even though they try to extract the maximum out of it from their largest and most important economic centers. However, the negative effects of increased circle rates can prevent growth, which state governments are acutely conscious of. Given this, it is unlikely that the Centre or the states will ever talk seriously on the matter, and at best the issue, as always, remains the proverbial storm in a teacup.  


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