In many areas of Rajasthan and Madhya Pradesh, the price of petrol has exceeded INR 100/litre. In many other cities, it is near the range of INR 90/litre. Why has the petrol price crossed more than ₹100 per litre across many places in India? Is it the fault of global crude oil prices or is it the excise duty that has been put up by the Central Government or the VAT that is being put by the State Government? Let’s find out this phenomenon and discuss how can we control rising petrol prices.
Why is Petrol at 100 rupees?
Last year, because of lockdown and no international travel, the demand of crude oil crashed and prices slipped from 66 dollars per barrel to 18 dollars per barrel. At that time, Central Government raised taxes and earned extra revenue. But from October 2020, things started inching back to normal and demand for fuel started rising. And when demand increased, global prices also increased. Crude oil prices went up by 150%. But the taxes which were increased by the Government didn’t go down. But in India’s rising fuel price story, there is a third party involved apart from Central and State Government. There is a global cartel that controls oil prices worldwide.
This cartel is called Organization of the Petroleum Exporting Countries (OPEC). OPEC controls 75% of the world’s crude oil output. For oil prices, the whole world is at the mercy of these few countries. When for any reason global oil prices start falling, then these countries reduce the production of oil as well. If there is less oil in the world, global prices will increase for sure. OPEC has decided to cut the production of oil by an extra 1 million barrels per day until April. This will keep global prices high for the coming times. This is an important reason why fuel prices are rising worldwide. In 2013, India used to buy 1 barrel for 110 dollars and today it’s price is around 55-65 Dollars per barrel, but still fuel is more expensive than before.
Whether you buy petrol or diesel directly or not, but when petrol prices rise, it leads to inflation. And all of this impacts the common man and thus, highlights the need to control rising petrol prices.
Deregulation of Petrol Prices
In today’s time, the Government of our country uses the Dynamic Pricing System to decide the price of petrol and diesel. The way crude oil prices fluctuates in the global market, similarly petrol prices fluctuates in our country. So this can be called as deregulation. That is to say the Government is not directly controlling the price of petrol. Rather the global market is controlling what should be the price of petrol. Previously the price of petrol and diesel used to change on 1st and 16th of every month according to the global market. This states that the price used to remain constant for about 15 days.
But on 16th June, 2017 the Indian Government introduced a new scheme which stated that instead of revising the price every 15 days, it will be revised everyday. Everyday the price of petrol and diesel would be revised at 6 O’clock in the morning which is still prevalent as of today. Due to this very reason, you hear everyday that the petrol prices go up by a rupee or 50 paisa. Now let’s talk about the present scenario. Crude Oil is the raw material of both petrol and diesel, and in India about 84% of petroleum products are imported.
How much tax do we pay on Fuel?
The problem is out of what we pay for petrol, only 33% is its cost and the rest are taxes. As of today the price of crude oil is 64 dollars, which is around INR 4672 per barrel. One barrel contains 159 litres of crude oil. Which means that the Indian Government purchases oil for ₹29.7/litre. Freight and Insurance is added to this and then different petroleum products are made by refining the crude oil. Let’s consider petrol, ₹3.6/litre is charged as dealers commission. This comes up to ₹33.9/litre (₹29.7 + ₹3.6) which is the total cost before adding tax. Today, Central Government charges 33 rupees on every litre of petrol. And different states also charge their VAT. This VAT is different in every area.
Solutions to control rising petrol prices in India.
1. Bring Petrol and Diesel under GST: Today, the basic problem is that we pay tax on tax for fuel. Excise duty for the Central Government and VAT for the State Government. This pressure is falling on the common man. Reserve Bank of India’s monetary policy committee says to cut down fuel taxes to ease inflation concerns. Out of excise duties collected by the Central Government, 41% is given back to the state for its spending. State Bank of India’s report says that if petrol and diesel is brought under GST, petrol price can come down to ₹75/litre and diesel to ₹68/litre. This will help control rising petrol prices and make them transparent and uniform. The calculation will be somewhat like this: 10.47 rupees GST at 28% and 30 rupees cess. Total price would be 77.87 rupees. But this decision will reduce Central Government’s Tax revenue significantly.
2. Tax on Non-essential goods. With every Rupee 1 rise of Excise Duty, Government earns extra ₹14,000 Crores. This also means that if Excise Duty is reduced by one rupee, then revenue lost will be to the tune of ₹14,500 Crores. Government earns 4.5 trillion rupees by taxing petrol and diesel. Tax revenues help to develop the country. It funds roads and other development projects. If fuel is brought under GST, then tax revenue will reduce. The logical question is from where will Government earn more money? Without searching for any other alternatives, reducing fuel prices will be right move socially for the people but will have economic consequences on future. Rising petrol prices will keep increasing inflation in the country. This not only impacts those who can afford their own personal vehicle, but it also impacts a poor person. But there are a few things which only impact a direct consumer. India has the 2nd highest number of tobacco users in the world. 27 crore adults are tobacco users. By levying Re.1 cess on bidis and increasing the tax on other tobacco products, Government can earn 50,000 crore extra every year. In India, cigarettes are taxed at 49%, whereas smokeless tobacco is taxed at 63% and bidis are taxed only at 22% right now. FYI for every ₹100 received as excise duty on tobacco products, Indian Economy loses ₹816. That’s why smoking kills the country as well. The World Health Organisation (WHO) recommends taxes to be at least 75% of the retail price of all tobacco products. Lottery, gambling, game shows are called windfall gains have a tax of 30%. In 1991 this rate was 40%. In this pandemic year this rate should be increased to 35% to 40%. This is not an extra burden on anyone as such because these are not essential.
3. Reduce dependency on Oil: Last year when crude oil prices were low, India took a good step. By buying more oil at lower prices we filled our petroleum reserves. There are three underground reserves in the country where 10 days worth crude oil has been stored at low cost price. But this a very short team solution for the issue. Because we have a provision only for the next 10 days. In the long run we need to reduce crude oil dependency. Council of Energy, Environment and Water (CEEW) says that India could save over INR 1 lakh crore annually in crude oil imports if we can achieve our 30% Electric Vehicle (EV) penetration target. We can see many Indian startups and companies like Tata/Mahindra consider EV’s as the future of Indian commute. Particulate matter, which causes pollution routinely in Delhi, will reduce by 17% once we shift to EV’s. Hand in hand the EV revolution will also create 1,20,000 new Jobs. Rather than talking about rising petrol and diesel prices each year, it is better for us to move towards cleaner, better and self reliant fuels.