HIKE IN PRICES OF PETROL & DIESEL



Prices of petrol are increasing in India for a long time now. In many states, the prices have crossed the mark of 100 Rs/L. How is the price of petrol determined? What is the role of crude oil prices in it? Let us understand each and every segment of it.

DETERMINATION OF PETROL PRICES

In India fuel prices depend upon many reasons
  • Global crude oil prices
  • VAT (Value Added Tax)
  • Excise duty
The VAT is imposed by state government whereas Excise duty is imposed by the central government.

GLOBAL CRUDE OIL PRICE

The prices of crude oil has risen sharply in 2021 after  the pandemic. The reason for increase in Crude oil prices is the 'Demand'. In pandemic (2020) the prices fell down to about $19.6/ barrel (can be seen in the graph) as demand was decreasing. But when people started going out of their home after lockdown, the demand started increasing and prices touched $74.4/ barrel.
The price has risen by 37.1% to about $71/ barrel from about $51.8/ barrel at the beginning of this year.
This global increase in crude oil prices have a direct impact on fuel prices in our country but up to 37.1% only. In 2014, the crude oil prices touched $99 mark but then also the petrol prices in our country never crossed the bar of 100 Rs/L. So, what is the reason for this hike?












TAXES

Increasing central and state taxes on petrol and diesel are the key reason for this hike.
In Delhi, central and state taxes account for about 57% of pump prices of petrol and about 51.4% of the pump price of diesel.
In 2020,  the central government had hiked the excise duty on petrol by Rs 13 per litre and on diesel by about Rs 16 per litre to cover up revenues as pandemic led to sharp fall in economic activity.

The VAT is tax added by the state. It can be removed by the government in case the prices are too high. For example- states like Rajasthan, West Bengal, Assam and Meghalaya decreased VAT to get relief on the petrol prices. But the central government hasn't cut central taxes despite calls from RBI (to control inflation).

So, the prices of petrol are not only hiked by the Crude oil prices but taxes play a major role in it.

HOW IS INCREASED PETROL PRICES AFFECTING US?

Whatever we eat, wear, use, etc All the goods and services available to us have to reach us by some means of transportation (airplane, truck, ship, etc). The major requirement of transportation is the fuel. Now, if the fuel prices are increased, the companies have to increase the prices of the goods and services that they are providing. This situation is called cost push inflation. There are two types of inflation-
  1. Demand pull- It is a type of inflation which occurs due to an increase in demand of a product or service. This type of inflation can be controlled by RBI policies, RBI can increase the interest which in turn will lead to decrease in demand for loan which will lead to control in demand of other products.
  2. Cost push- It is a type of inflation in which overall price of goods and service increases due to increase in cost of a specific product ( In this case PETROL PRICES).
RBI has a target of  keeping inflation between a range of 4% +- 2
Right now, Retail inflation is 6.30% and wholesale inflation is 12.94% which is all time high. 
RBI cannot control cost pull inflation.

HOW CAN INFLATION BE CONTROLLED?

Inflation can be controlled by 2 methods-
  1. By controlling the excise duty on petrol and diesel.
  2. Use of electric vehicles can reduce this inflation to a great extent. In US, many companies are focusing on electric vehicle. India is highly dependent on energy imports (more than Rs 12,00,000 crore). This can be reduced by the use of electric vehicles. Also, PM Narendra Modi has taken a pledge to make India energy independent before completing 100 years of Independence by introducing National Hydrogen Mission.