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Mathematics of rising petrol, diesel prices: Blame govt taxes, not crude oil for steep hike in cost of petroleum products

While crude oil remains cheaper, steep taxes levied by central and state governments have resulted in petrol and diesel prices going back to 2014-levels

Written by: Parimal Peeyush, New Delhi [ Updated: September 18, 2017 19:11 IST ]
Petrol prices have risen sharply since the introduction of
Petrol prices have risen sharply since the introduction of dynamic pricingPhoto:PTI

The nation has been reeling under the onslaught of the steep hike in petrol and diesel prices since the government's decision to introduce daily price revision for fuel prices. While the move to replace fortnightly price revisions with dynamic pricing was aimed at protecting the consumer from a sudden spike in international oil prices and ensure transparency, the over Rs 7 hike in the two months following the government’s decision have taken the sheen off the government’s tall claims.

We reported last week how the rise in prices has far exceeded the change in crude oil price. And while the government has kept the narrative fixed on crude prices and the rising dollar, it fails to account for its own doing that has resulted in the current suffering for the common man.

Contrary to the perception of oil marketing companies filling up their coffers in the guise of the too-little-to-show variation in fuel prices every day, one look at the taxes that the governments levy on fuel brings forth a different evil altogether.

Data shows that between July 1 and September 15, 2017, the price of petrol in Delhi rose from Rs 63.09 per litre to Rs 70.43 per litre today, corresponding to an increase of 11.63 per cent in the price of petrol after the introduction of dynamic pricing.

However, considering that the price of petrol is at almost the same level that it was in March 2014, two months before the Modi government stormed to power, and the price of Indian basket of crude oil stood at $108.6 per barrel – double the price that it is today – makes the case extremely peculiar.

Understanding the divergence requires a look at the mathematics that goes behind arriving at the retail price – or what we pay – for petrol and diesel.

The Mathematics Behind Fuel Prices

The process of determining fuel prices begins with crude oil. The international price of the Indian basket of crude oil stands at $54.56 bbl or around Rs 3,495.93 per barrel. According to Indian Oil data as on September 14, the cost of crude oil plus ocean freight charges amount to $65.48 per barrel, which amounts to Rs 4,222.15 per barrel at an exchange rate of Rs 64.48. One barrel of crude is 159 litres, effectively taking the cost of one litre of imported crude oil to Rs 26.55.

The crude oil is then procured by the Oil Marketing Companies from refineries. The basic cost calculation of OMCs includes entry tax, refinery processing, landing cost and margins. Going by Indian Oil data, OMCs procured oil from refineries at Rs 26.65 per litre as per Thursday’s cost.

Indian Oil, after charging its margin, on Thursday sold fuel to dealers at a cost of Rs 30.70 per litre. Had it been an ideal world, this is the price that we would have had to pay for a litre of petrol. Sadly, that isn’t the case.

It is going forward from here that determines the toll the consumer will have to bear for government policies. An amount of Rs 21.48 per litre is added to the cost for the consumer on account of excise duty levied by the Centre. Add to this the dealer commission of Rs 3.24 and then the Rs 14.96 Value Added Tax (VAT) that the Delhi government charges at 27 per cent (on fuel as well as dealer commission), and you get the selling price of petrol at Rs 70.39 per litre.

From Rs 30.70 that it costs to dealers, price of a litre of petrol goes up to Rs 70.39 per litre – an increase of over 129 percent on account of state and central taxes.

The Tax Factor

After coming to power in May 2014 – when the cost of international crude was hovering at around $100 per barrel -- the Narendra Modi government effected a series of increases in excise duties.

As per official data, excise duty on petrol has increased by 54 per cent since November 2014. Similarly, VAT has seen an average increase of 46 per cent on petrol while dealer's commission has gone up by as much as 73 per cent.

Excise duty in the case of diesel has gone up by 154 per cent, VAT by 48 per cent and dealer's commission by 73 per cent.

In all, the Modi government has effected an increase in excise duty on petrol and diesel on 12 occasions since 2014.

During this period, the government hit a jackpot as revenue from petroleum products increased from Rs 3.32 lakh crore in 2014-15 to Rs 5.24 lakh crore in 2016-17.

On the other hand, the taxes collectively levied by the Centre and states have resulted in fuel prices going back to where it stood in 2014 despite crude oil becoming cheaper by almost half.

Fuel prices: India vs the World

Prices of crude oil, which the government has used to its defence to counter allegations for the steep increase since daily price revision was effected without factoring in the price variation from when it came to power, matter not just to India.

Globally, the currency value coupled with the international crude oil prices make up for the primary factors that go into the calculation of local retail fuel prices.

Still, India stands among the countries where the government charges highest prices for fuel from its citizens. In the US, for example, the average price of the petrol (gasoline) is $0.70 dollar (Rs 44.84) per litre as on September 11. One can find in most developed western nations the price of the petroleum products at the similar level.

Another example is that of China, which India pits itself in competition with. Petrol price in China stands at an average of 6.5 Yuan (Rs 63.50) at current exchange rates.

While these countries are economically far superior to India, even the likes of poorer nations – including Pakistan—fare better when it comes to petrol price. Petrol price in Pakistan currently stand at 71 Pakistani rupees or INR 43.17. Even in terms of taxes, Pakistan levies almost half of what India – a far superior country by all measures – levies on its countrymen.

Pakistan is no exception – all other South Asian countries like Sri Lanka, Bangladesh and Nepal pass on the benefits to consumers of petrol and diesel.

Govt Response to Common Man’s Crisis 

The Centre, facing flak from all around, has decided against a rollback of taxes – there have been no indications to this effect until now. The government believes the hike in prices is short-lived and does not merit a knee-jerk response.

The government’s response to demands for a rollback of the daily prices revision has also been similar.

However, it is the remark by newly inducted Union Cabinet minister KJ Alphons that comes as the biggest shocker.

The minister, of ‘DDA demolition man’ fame had this to say when questioned about the government’s stand with respect to the impact of rising fuel prices on the common man:

“…we are going to tax people who can afford to pay. Somebody who has a car, bike; certainly he is not starving. Somebody who can afford to pay, has to pay.”

Go figure!!

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