Today (September 1), petrol and diesel prices were cut by ₹2 and 50 paise a litre, respectively. This is the latest in a series of cuts that have made the fuels much cheaper since June 2014, when the rout in crude oil began.
In Delhi, at ₹61.2 a litre, petrol costs about 14 per cent less and, at ₹44.45 a litre, diesel costs about 22 per cent less than they cost last June. Sure, that’s good news for customers and has helped bring down overall inflation too. But it could have been much better.
The decline in petrol and diesel prices in the country is far less than the fall in the price of crude oil. Brent oil has tanked nearly 53 per cent from about $109 a barrel last June to $52 a barrel now. And, with it, the cost of the Indian crude oil basket has also fallen more than 50 per cent.
So, why have petrol and diesel not fallen as much? After all, these fuels have been decontrolled and their prices should ideally move in sync with crude oil prices. Petrol was decontrolled way back in 2010, while the government made good use of the crude oil rout to decontrol the diesel price last October.
Three factors have conspired against you, dear reader. One, instead of passing on the entire benefit to its citizens, the Central government, always on the lookout for funds, chose to pocket a good portion of the gains from crude oil’s rout.
It raised excise duties on the fuels four times since last November — totalling ₹7.75 a litre of petrol and ₹6.5 a litre of diesel. The government garnered about ₹20,000 crore as additional revenue in 2014-15 from these four hikes. Excise duties today account for about a quarter of the retail prices of diesel and petrol.
Next, the Delhi State government also sensed an opportunity and raised the rate of value added tax (VAT) on the fuels recently in July. The tax on petrol was raised from 20 per cent to 25 per cent and on diesel from 12.5 per cent to 16.6 per cent.
In rupee terms, this translated into ₹2.78 a litre of petrol and ₹1.83 a litre of diesel. Interestingly, local taxes on petrol and diesel are still lower than in cities such as Mumbai, Kolkata and Chennai, where the fuels cost more. It’s clear that governments – both at the Centre and the States – are making the most of this milch cow.
Weak rupee plays spoilsport
Finally, the weakness in the rupee also played spoilsport. From about ₹59 per US dollar last June, the rupee has slipped to ₹66 currently. This 12 per cent slide has chipped away at the benefit from the crude oil dip in local currency terms. The price of the Indian crude oil basket has dipped 57 per cent in dollar terms since last June, but in rupee terms the price has fallen by a lower 52 per cent.
If it’s any consolation, the Indian fuel consumer still has it better, for the most part, when compared with consumers in neighbouring countries. Diesel in India is cheaper than in Pakistan, Bangladesh, Sri Lanka and Nepal, while petrol is cheaper than in Bangladesh and Nepal.