Scroll explainer: Why petrol and diesel prices in India keep on rising (and rising, and rising)

Rising petrol and diesel prices are such a fixture of Indian life of late, that they have sparked their own sub genre of humour. Recent hikes have made petrol and diesel prices touch record levels – even as consumers already suffer the effects of the coronavirus lockdown.

So why have fuel prices in India been rising in recent months? Here’s an explainer that breaks it down.

What has happened with fuel prices in India?

On June 8, India prepared to gradually lift its lockdown – the harshest coronavirus containment measure across the globe.

Just at that time, however, Union-government controlled oil marketing companies decided to start increasing the price of both petrol and diesel. Starting from June 7, fuel prices went up for a consecutive 22 days. In Delhi, the price of petrol increased by Rs 9.13 and diesel by Rs 11.1 in this period – an increase of 13% and 16%, respectively.

So remarkable was this price rise that for the first time ever, diesel became more expensive than petrol in some states (state-specific taxes mean each state in India has different fuel retail prices).

This price rise comes even as the Indian crude basket is seeing low prices. Priced at $71 per barrel at the start of FY 2019-’20, it stood at only $40.83 per barrel as of July 28, 2020 – a drop of more than 42%.

The Indian crude basket is an index consisting of different crude grades according to which – in theory – retail price of petrol and diesel are supposed to be benchmarked. In practice, however, this benchmarking only works if crude prices are going up. If they are going down, consumers rarely get passed on the benefit, as the recent price hikes illustrate.

So why do retail prices go on increasing when crude is falling?

Taxes, that’s why.

For example, crude prices crashed as the pandemic hit the globe. In April, the Indian basket even went below $20 per barrel (remember it was around $70 per barrel a year earlier). However during this time, for nearly three months upto June 7, fuel prices remained unchanged since increasing taxes balanced out the decreasing input costs of crude.

In May, the Union government hiked excise duty on petrol by a record Rs 10 per litre while the duty on diesel went up by Rs 13 per litre. In the meanwhile, as many as 13 states announced a hike in their own fuel taxes.

This is part of a pattern of excessive taxation of fuel – which governments tend to use as a cash cow. A pattern which has resulted in a tax component that is somewhat absurd. In Delhi, for example, two-thirds of what a person pays at the petrol pump consists of Central excise and state value added tax.

India has, as a result, the highest tax rates on fuel compared to any other country in the world.

Why is the government so keen on taxing fuel?

The sharp rise in fuel taxes is a result of government compulsion. Revenues from the Goods and Services tax are falling hard hitting both the Union government as well as the states. GST revenues in the first quarter of 2020-’21 are 41% lower compared to the same period in the previous year.

Moreover, since both Union and state governments can quickly raise fuel rates on their own – rather than having to take a collective decision for GST – this might be an easier option for them at this time of crisis.

To add to this, petrol and diesel sales have risen sharply in June – 36% and 20%, respectively compared to May.

For the Union government, specifically, fuel excise is a lucrative option given that a substantial portion of it consists of a cess – a class of taxes that New Delhi does not have to share with the states. In May, for example, as Central excise on petrol went up by Rs 10, Rs 8 of that was classified as a cess – money exclusively meant for New Delhi – and only Rs 2 as “special additional excise duty” to be shared with states.

Will the sharp price rise lead to inflation?

Given fuel is such a critical input for any economy, its prices rising usually means an increase in prices for a host of other goods and services – thus leading to greater inflation across the economy.

However, the current Indian economy is in an unusual place due to very low demand, which serves to ease pressure on inflation. For example, the Reserve Bank of India argued in its May Monetary Policy Committee meeting that there was a “meltdown in demand” which was “likely to result in a significant easing of price pressures in core goods and services”.

Low demand working at cross purposes with rising fuel prices might mean the danger of inflation could be low.

Will it have a political impact?

Rising fuel prices were a lightning rod for political criticism for the Manmohan Singh-led United Progressive Alliance in the last years of its second term. However, a repeat for the Narendra Modi-led Bharatiya Janata Party government looks unlikely.

For one, as pointed out earlier, chances of high inflation are low. However, rising petrol prices will still affect private vehicle owners – elites who have a disproportionate voice in social and mainstream media.

However, luckily for the BJP, elites are also a strong votebank of the party. In fact, it is the BJP’s strongest votebank, with 44% of the upper middle class and rich voting for it in 2019.

This might explain why there has been little backlash against the BJP compared to the UPA, even though fuel prices rose far more under Modi than Manmohan.