Here’s why fuel prices in India are at a record high

• Petrol and diesel prices reached an all-time high in India this morning.
  
• Not only is this a result of the rise in global oil prices, which are nearing $80 a barrel, but also because of the Indian government’s excise duty hikes.
  
• Excise duties and value-added taxes currently comprise over 50% and 40% of the price of petrol and diesel, respectively.
  

Paid a bomb for fuel today?

After a three-week pause in the build-up to the Karnataka elections, fuel prices in India reached a record high this morning after increasing for eight consecutive days. In Delhi, petrol and diesel cost ₹76.87 per litre and ₹68.08 per litre, respectively - a 10% plus rise from the beginning of 2018. The highest fuel prices in the country were seen in Mumbai, where petrol is being sold for ₹84.70 per litre, while diesel costs ₹72.48 per litre.

Since June last year, India has had a dynamic pricing regime, wherein fuel prices change on a daily basis in response to the global market. This alarming spike, however, begs the question. Why are fuel prices in India so high?

Firstly, global oil prices are rising, nearing $80 a barrel amid curbs in production by OPEC (Organisation of Petroleum Exporting Countries) countries like Saudi Arabia. However, if this were the only reason, then countries that import oil from India, like Sri Lanka, where petrol is currently ₹59 a litre, and Bangladesh, where petrol is ₹69 a litre, would have similar (if not higher) fuel prices.

In addition to the global price of crude oil that is borne by distributors, fuel prices in India are composed of excise duty, which is collected by the central government, and value-added tax, which goes to state governments. The higher fuel prices are a direct result of the central government’s taxation and excise policy on petrol and diesel.

Since taking over the Centre in 2014, the BJP-led government has hiked excise duties on fuel more than 10 times. It bears mentioning, however, that there have been no hikes this year though global oil prices have risen. Since the initial part of the BJP’s stint coincided with a sharp reduction in global oil prices, it imposed higher duties on customers in order to increase its revenues.

As a result, consumers did not benefit from lower oil prices. Despite the price of Brent crude oil plummeting from $102 a barrel in July 2014 to $34 in early 2016, the price of petrol in Delhi only fell from ₹73.6 per litre in July 2014 to a low of ₹56.6 by March 2016.

From an excise duty of ₹9.20 a litre on unbranded petrol in November 2014, excise duties currently stand at ₹19.48 per litre. Meanwhile, the excise duty on diesel has risen from ₹3.55 a litre in November 2014 to a current level of ₹15.33. Thus, excise duties comprise roughly 25% of the purchase price of fuel today. Including VAT, the proportion comes to more than 50% in the case of petrol and over 40% for diesel.

A correction is necessary

High fuel prices affect everyone. They significantly increase your transportation expenses and reduce your disposable income. They increase the costs of transporting goods for companies, which leads to higher product prices. They lead to higher airfare. Even if you don’t own a car, you end up paying higher for transport.

The government is likely aware that higher fuel prices and the resulting contraction in demand and investment will weigh on economic growth. Hence, it needs to act decisively. Earlier this week, India’s Oil Minister, Dharmendra Pradhan, told reporters that the government was exploring measures to reduce fuel prices but he gave no details on what these measures were.

Since the government has no control over international oil prices, it seems that the only option at its disposal could be to reduce either the duties or value-added taxes on fuel.

Another measure involves scrapping duties and value-added taxes entirely and bringing fuel products under the GST regime - something that has been proposed by a number of experts as well as the FICCI, an industry association. Even the highest tax rate of 28% for luxury products would result in lower prices.

Any measures, however, will entail a reduction in government revenues. But it will be worth the boost to aggregate demand.