India is the world’s fourth largest consumer of energy but with low per capita energy consumption. With the ever increasing number of private vehicles, an overall domestic consumption of petrol and petroleum products is on rise in India. There was a registered growth of 5.31% of the same in the year 2017-18 and to meet the increasing demand, government has to import more and more petrol. If spending of the country as a whole is considered, then 80-90% is done to pay the import bills on petroleum products, which is accounted as country’s expenditure. Hence more demand of petrol than supply is a leading factor of its rising price in India.

But rise in petrol price in turn has a rippling effect. As all the commodities are transported across India on vehicles that run on petrol or diesel, so increase in petrol price results in price rise of these commodities as well. The greatest sufferer of all this is a common man. He is already bearing the pressure of inflation and any increase in petrol price will further reduce his actual household income. Today every Indian spends almost half of his income on food items. If the petrol price in India keeps on increasing then every food item will get costlier. It will result in less of savings and more of expenditure. This in turn will affect the real estate, banking and other sectors in India. Eventually, more and more people will be pushed towards poverty line.

Why India needs to import oil? India does not have enough of oil to meet the growing demand of oil. Near about 1.4 million barrels of diesels are used per day in India especially by farmers, trucks and industry. So to meet the growing demand, most of the oil is imported from other countries, resulting in more expenditure. It has been seen that petrol price has continuously increased from December 2013 onwards and still rising. Ultimate result of price hike of petrol is inflation.

Not only this, but the condition of Indian currency is also not favourable at present. India is going through currency crisis where value of Indian Rupee is falling to US Dollar. That is why Oil Marketing Companies (OMCs) like Indian Oil Corporation (IOCL), Bharat Petroleum (BPCL) are paying more for the same quantity of crude oil. Due to this, OMCs lost near about Rs 43,760 crores in the past 2018-2019 fiscal due to under-recovery.

The price of petrol used to be stable in India but with the deregulation of petrol in 2010, Oil Marketing Companies can increase the petrol price if large variation in cost is observed by these companies. Oil marketing companies do so by linking the domestic price of petrol to international market rates.

 

Why petrol price is rising in India?

Depreciating rupee is one of the major reasons of the increase in petrol price in India. So we must understand that why rupee is depreciating like a free fall. Economists believe that current euro crisis is one of the fundamental reasons of depreciating rupee. But if this is the main reason then why other currencies like Pound, Brazilian Real, etc are not getting affected to that extent. In fact Yen has moved up against dollar.

So there must be some other reasons as well. Ever increasing fiscal deficit (difference between revenue and expenditure) is one of the factors leading to currency crisis in India. We spend more than what we earn. For the year 2017-2018, fiscal deficit was Rs 6.45 lakh crore. Major reason leading to this fiscal deficit is the financial funding or subsidy offered on petroleum, food and fertilizer. Cost of subsidy on oil for the year 2018-2019 is estimated to be Rs 24,933 crores. Moreover, India’s net import of petroleum products is also increasing. For the year 2017-18, it was 1,89,061 TMT, which was more than 91% of total consumption of petroleum products in the country.

Present earning of government is less than its expenditure which means that fiscal deficit of government is increasing. Moreover, fiscal deficit is linked with trade deficit which means more import than export. Major portion of India’s import is oil. Since import of oil is always paid in dollars, so importers need to buy dollar by paying rupees. Present currency crisis means more rupees have to be given for the same dollars leading to more rupees in the market. Applying demand and supply theory, rupee is continuously losing value and OMC’s have to pay more for the same amount of oil imports.

If the price of oil products is not increased, India will keep on facing this deficit. Price increase will decrease the demand which in turn need fewer dollars for oil import. Trade deficit will also be lowered down leading to lesser pressure on rupee-dollar rate. Not only petrol price but the price of diesel, LPG and kerosene will also be increased to have more prominent impact. This will improve the fiscal deficit of the government and lead to economic growth.

On the other hand, price rise of petrol can be controlled if the government reduces its revenue from the taxes on petroleum. 35% of government’s income is generated through petroleum taxes and as there is no other substitute to this so probably this won’t be done by the government. Hence petrol price for sure will increase. But indeed Government has to take strong decision as increasing prices will solve one problem but leads to many other such as poverty, inflating, high cost of living, frustration etc.

 

How the petrol price is calculated?

Petrol price is calculated on the basis of worldwide supply and demand factors. Foreign suppliers sell crude oil to Oil Marketing Companies (OMCs) in India at benchmark prices. Delivery price at the refinery and Brent crude’s daily price are considered to calculate actual cost of petrol in India.

One barrel of crude oil contains about 160 litres of oil priced in US dollars. To calculate price, US dollars are converted to Indian rupee and then divided by 160.

After buying, crude oil is transported to refineries in India. India at present has about 20 refineries. Crude oil is then separated into various products like petrol, diesel, coal tar, etc in distillation towers of these refineries. Cost of distillation and refining is added to the price of petrol. Also crude custom levy and charges from ports to the refinery is added.

Separated petrol is now ready to be stored in the storage tanks of the oil companies. Oil companies now pay to the refineries and to this added the cost of transporting petrol from refinery to OMC’s tanks. So the actual price of petrol that a consumer pays includes all the above mentioned cost plus commission of a dealer, VAT, excise duty, total duties and taxes.

Thus petrol price is the cost price that includes procuring, refining and marketing plus taxes that include central and state taxes.

Current Petrol Prices in India*

Diesel/ Petrol Prices in Rupees/Litre
Diesel Rates Petrol rates
Delhi 65.35 72.07
Kolkata 67.73 74.77
Mumbai 68.51 77.73
Chennai 69.04 74.86

*As on 27 August 2019

 

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