High fuel prices in India – What are the causes?

petrol prices india

Theme:

  • There is a huge criticism over high fuel prices in India despite having low crude oil prices internationally.

Reasons for the high fuel prices in India:

  • Petrol and diesel pricing depends on several factors. Final retail price = crude oil price (international price of crude oil) + refinery charges + transport charges + dealers’ commission + Central Excise Duty (Imposed by Central government) + Value Added Tax (VAT) & surcharges (Imposed by state government).

    One of the main reasons for the high fuel prices is high taxes by central and state governments (Central Excise duty + VAT & surcharges). As of April 2021, two-third of the price we pay for petrol goes to central and state governments as taxes. India is one of the most highly fuel-taxed countries in the world. The government explained that this revenue is needed to spend on welfare schemes.

  • Petrol and diesel are still not in the ambit of GST (Goods & Services Tax). If they come under GST, taxes on taxes will be avoided and hence the retail prices will be reduced.
  • The efficiency of petroleum refineries in India is one of the worst in the world. This is contributing to the price rise of petrol and diesel.
  • India is third in the top countries that use crude oil after the USA & China. But the problem is that India does not have many oil reserves. Over 80% of the crude oil for our fuel needs is imported. So, import costs will be added to the final price. There is a lack of investment in the exploration of crude oil reserves within the country.
  • As the Rupee value is depreciating, oil refineries have to pay more rupees to import crude oil. This is also one of the reasons why fuel prices are high.
  • Saudi Arabia-led OPEC countries (Organization of the Petroleum Exporting Countries) decided to cut production to prevent the fall of crude oil prices during the pandemic. As of March 2021, they decided to continue with the production cuts. So, less supply and more demand result in high prices.

Consequences of high fuel prices:

  • High petrol and diesel prices contribute to higher transportation costs and hence increases in the prices of essential commodities such as vegetables, rice, pulses etc. This is a big burden on commoners who are already facing job losses, low income due to pandemic.
  • High fuel prices increase the prices of commodities and can cause inflation.

What needs to be done:

  • Reducing taxes on petroleum products will result in a reduction in costs of transport and thereby reduces the price of many consumer goods. This will result in an increase in markets and economy and also reduces the burden on common people.
  • Instead of depending on these taxes on petrol & diesel, the Indian government needs to create more revenue sources such as increasing the number of people that pay income tax, recovering bad loans of public sector banks etc.
  • More and more people are buying their own vehicles, especially after witnessing the pandemic and hence the demand for petrol and diesel is increasing and thereby the pressure on foreign exchange reserves and ‘Trade deficit‘ are increasing. This will further lower the value of the rupee. To reduce the dependence on crude oil imports, there is a need to invest in the exploration of crude oil reserves in the country.
  • There is a dire need to encourage people to use electric vehicles and to use renewable energy resources. This will reduce the burden on foreign exchange reserves as well as leads us towards eco-friendly living.

Conclusion:

If the crude oil prices are increased in the coming days, there will be a huge burden on people whether they own a vehicle or not. Because high fuel prices increase the cost of transport and thereby increases the price of consumer goods. To avoid that situation, the government needs to work on reforms in petroleum pricing.

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