Petrol prices score a hundred on crude levy pressures

The price of petrol has already crossed Rs100 per litre in several parts of Rajasthan, Madhya Pradesh and Maharashtra.

May 18, 2021 08:05 IST India Infoline News Service

On 16 May, petrol and diesel prices were hiked for the 9th time in the current month. The price of petrol has already crossed Rs100 per litre in several parts of Rajasthan, Madhya Pradesh and Maharashtra. In the commercial capital of Mumbai, Petrol prices have scaled Rs99/litre. In short, petrol and diesel prices are on a crazy run.

Globally, petrol prices range from $0.06/litre in Iran to $2.49/litre in Hong Kong. Indian petrol at around $1.30/litre is somewhere in between, but that is off the point. Unlike countries like Hong Kong, Netherlands and Norway, where petrol costs more than $2/litre, India has a per capita GDP of just about $1800. Most of the European nations have per capita GDP in excess of $70,000. Secondly, the price of petrol has crossed Rs100/litre at a time when joblessness scaled 7.97% and millions of Indians have sunk economically lower.

Brent Crude prices inching closer to $70/bbl

The chart below captures the one-year price movement of Brent Crude and it has been one linear up-move since the lows of last year.

Data Source: Bloomberg

Brent Crude bounced back sharply from the lows of $15/bbl in April 2020 and is now scaling close to $70/litre. The spike in oil prices has been driven by the consistent supply cuts by the OPEC and Russia, which took Brent Crude to $70/bbl. In early November, Brent Crude was at $37/bbl and it has moved up 87% in the last 6 months. Why does crude price matter?

Remember, India imports ~80% of its daily oil requirement and hence the international price of crude determines the landed base price of oil in India. If the crude goes up, then the price of petrol and diesel in India also go up. However, it is not as simple as that. The real problem lies in the break-up of the price of petrol in India. There is more to the petrol price hike than just crude prices.

Petrol price break-up in some key Indian states

The table below captures the break-up of petrol prices in five Indian states.
State Landed Base Price State Tax Central Taxes Dealer Commission
Mumbai 31.84% 28.83% 35.37% 3.96%
Rajasthan 32.61% 27.12% 36.23% 4.05%
Tamil Nadu 33.34% 25.48% 37.04% 4.14%
Telangana 33.34% 25.48% 37.04% 4.14%
Karnataka 33.41% 25.31% 37.12% 4.15%
Data Source: Petroleum Ministry

The above table reveals that while landed cost does have a lot of impact on petrol and diesel prices in India, it is just one of the factors. On an average, less than 33% of the cost of one litre of petrol is attributed to the landed cost of crude. Even if the price of crude goes up, the impact on petrol and diesel will only be partial. On an average, it is the state and central taxes that account for close to 63% of the cost of one litre of fuel. Dealer commissions have been static at around 4%.

That brings us to the logical corollary. If petrol and diesel prices go up with Brent Crude, why does the price of petrol and diesel not fall in tandem with falling crude prices. That is due to the share of taxes in the price of one litre of petrol (state and central taxes combined). Let us see how it has changed since 2014.

It boils down to a steep hike in taxes on petrol and diesel

Data Source: Petroleum Ministry
Over the last 7 years, an interesting narrative has played out in Indian oil prices. Here is a quick comparison. In 2014, the landed base price accounted for 63% of the cost of one litre of petrol, but in 2021 it accounts for just 36%. During the same period, the share of state taxes has gone up from 18% to 23%. But the real shift has been the share of central taxes in oil sales. Central taxes would account for just 16% of the price of petrol in 2014, but today it has more than doubled to 37%. That is what makes it complex.

What makes oil petrol prices sticky in India?

In India, petrol and diesel prices are always politically sensitive. But these are also inflationary as higher diesel prices almost gets priced into every product. In the last 7 years as crude continues to remain 35% below the pre-2014 prices, government substantially hiked excise duties on petrol and diesel to supplement revenues. With fiscal deficit at 9.5% in FY21 and 6.8% in FY22, one can perish the thought of excise duty cuts on oil.

The only hope against inflating oil prices is a deflationary situation that automatically forces oil prices lower. But, as John Maynard Keynes said, “If inflation is unjust, then deflation is inexpedient. Of the two, perhaps, deflation is worse”. For now, paying more for petrol and diesel looks the lesser of the two evils.

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