Fuel prices at an all-time high: What's causing it and what can be done?

Everything you should know about the ongoing fuel price hikes. Here, we discuss the reasons behind the hike and factors affecting the prices

India's petrol prices saw 21 hikes since 28th September, when a nearly three-week-long hiatus in rate revisions ended. Taking stock of the condition at this point reveals that prices have gone up by Rs. 6.4/litre, with petrol rates already crossing Rs. 100/litre in most cities. This article will detail the reasons for hikes in fuel prices in India, their impact on the economy, and what steps can be taken to minimize costs.

How are fuel prices in India set?

Both diesel and petrol prices are set at 6:00 am every day. Oil marketing companies like Indian Oil Corporation Ltd, Hindustan Petroleum Corporation Ltd, and Bharat Petroleum Corporation Ltd set fuel prices based on several factors such as international product prices, tax structure, exchange rate, inland freight, and other costs. They are overseen by the Petroleum Planning and Analysis Cell under the Ministry of Petroleum and Natural Gas.

There's a simple formula that represents the process of price-setting for fuel:

Retail price of fuel = Price fuel distributors pay to oil marketing companies

+

Excise duty charged by the central government

+

Distributors' commission

+

State government VAT

Why are the current fuel prices in India so high?

This is the resounding question that every citizen in the country has been asking. Multiple factors exercise direct control over fuel prices:

High demand

The global demand for crude oil has increased in 2021 as the world economy recovers from the COVID-19 pandemic. The supply of coal has also decreased, leading to a sharper rise in crude oil prices.

Cost of crude oil

Brent crude oil costs have been rising steadily since hitting a low point of $16/barrel on 22nd April 2020. As of now, it has almost crossed the $80/barrel mark. In July 2021, the Indian basket of crude oil price averaged at $43.35/barrel. As of 25th October, this price sits at $79. This rise in international prices has significantly contributed to retail petrol and diesel prices hitting all-time highs in India.

Taxes

Increasing state and central taxes are among the primary reasons for the rise in fuel prices. For example, the central government excise duty for petrol has increased from Rs. 10.39/litre in 2014-15 to Rs. 32.90/litre now — a staggering rise of 217%.

Fuel prices in India also attract Value-Added Tax, with states like Madhya Pradesh and Rajasthan levying it at a steep 33% and 36%, respectively. This has led to a major surge in petrol prices.

The effects are more apparent now that crude oil prices are increasing due to a rise in demand — a symbol of recovery from the COVID-19 pandemic. Central and state taxes account for about 58% of the prices of petrol in Delhi.

Strength of the Rupee

India imports nearly 80% of the crude oil it consumes. When the dollar strengthens against the Indian rupee, the buying costs of oil marketing companies increase, causing a hike in retail fuel prices. The rupee is currently moving towards the Rs. 75/dollar mark, which will result in imported goods becoming more expensive.

How do rising fuel prices in India affect the economy?

The import of Brent crude oil accounts for nearly one-fifth of our country's import bill. Higher crude oil prices will cause a surge in India's expenditure and adversely affect the fiscal deficit. An increase in oil prices will also result in a corresponding hike in the cost of production and transportation of several goods. This could lead to higher inflation, causing panic in the equity markets and forcing the RBI to go for liquidity tightening measures and rate hikes.

What can be done about rising fuel prices?
 

Alternative fuel options

A reduction in taxes would heavily hurt central and state government revenues. Instead, the Indian government is pushing for alternative fuel options in the country and promoting biofuel, particularly ethanol, which will reduce India's dependency on crude oil imports and subdue carbon emissions. Ethanol will also push the sugar industry as it is one of the by-products of sugar production. With that in mind, the government has recently fast-tracked its target for selling petrol with 20% blended ethanol to 1st April 2023. The blending percentage of ethanol in petrol has risen from 1.53% in 2013-14 to 8.5% in 2020-21.

Including fuel under GST

There has also been a vocal demand to bring fuel prices under Goods and Services Tax (GST), which would cap the taxes levied to 28%. However, there has been no more progress in this regard. The decision to include fuel prices under GST has to be taken by the GST Council.

Changes in lifestyle

Though it might seem trivial on the macro scale of things, we can do certain things at our level to offset the fuel unaffordability and reduce a portion of our financial burden. Sharing rides, carpooling for regular trips, and switching to electric vehicles are some short and long-term solutions to the problem. The government has been actively pushing electrification with various subsidies and incentives. With these benefits, the upfront cost of owning an electric vehicle can be identical to a comparative ICE-powered one, which is helpful for the pocket and the environment.

Often overlooked solutions are e-wallets and credit cards, which offer various benefits like discounted prices and other reward point offers. For instance, IDFC FIRST Bank provides a variety of credit cards with unique benefits on fuel, like a surcharge waiver of 1% at all fuel stations across India that can save you up to Rs. 400 a month.

Unfortunately, it's unlikely that fuel prices will go down unless state and central governments collaborate with oil marketing companies and decide to rework their pricing structure.

It is interesting to note that citizens of neighbouring countries like Bhutan, Pakistan, and Sri Lanka can get their fuel for nearly half of our prices, even though none of them produces their own oil. Petrol is priced at an Indian equivalent of Rs. 68.4/litre in Bhutan, while the same is significantly cheaper at Rs. 50.67/litre in Pakistan. For instance, IDFC FIRST Bank provides a variety of credit cards with unique benefits on fuel, like a surcharge waiver of 1% at all fuel stations across India that can save you up to Rs. 400 a month and you can pay instantly with ease using our mobile banking app.

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