Why are petrol and diesel prices so high?

By Ashwin Tombat
28 June 2020 11:47 IST

After fuel prices increased for the 18th day in a row on Wednesday 24 June, the media announced that for the first time in history, diesel was costing more than petrol in India.

Not true.

That was only in Delhi, where diesel was ₹79.88 per litre and petrol ₹79.76 per litre. Prices in Goa that day, for example, were around ₹76.90 per litre for petrol and ₹75.60 per litre for diesel.

As is becoming very common nowadays, the media hadn’t done its homework properly. It wasn’t even the first time in history in India that diesel had become more expensive than petrol…

That distinction belongs to Goa. On 10 May 2013, Goa became India's only state where the price of petrol (then ₹52.10) was cheaper than the price of diesel (then ₹52.70).

This is because the late Manohar Parrikar’s government had slashed Value Added Tax (VAT) on petrol to 0.1 per cent in April 2012, as part of his election promise to reduce petrol prices for his entire five-year term. As a result, the price of petrol in Goa had dropped by a huge ₹11 per litre.

And it is the exact excuse, that diesel prices were higher than petrol prices, which his successor as Chief Minister in Goa, Laxmikant Parsekar, gave to break this major poll promise made in the BJP’s 2012 poll manifesto, after Mr Parrikar went to New Delhi as Union Defence Minister. On 24 December 2014, Mr Parsekar announced a 5 per cent value added tax (VAT) on petrol. “The cost of petrol is lesser than diesel in Goa, which is not fair… its price [should be] a little more than diesel," he said.

Since then, the Goa government has not only rolled back Mr Parrikar’s entire reduction in petrol prices, but gone on to further increase taxes from 22 to 25 per cent. As fuel prices soar, Goans miss late CM Manohar ‘Bhai’ Parrikar.

Why are petrol and diesel so expensive? Their source – crude oil – is presently priced at around $40 a barrel. When petrol (then ₹52.10) became cheaper than diesel (then ₹52.70) for the very first time in May 2013 in Goa, the price of crude oil was more than double, at $100 per barrel. But fuel at the pump was 33 per cent cheaper than its present price.

Fuel prices are likely to go up even higher in the days to come. Why?

Part of the reason is that crude oil prices are gradually rising as countries around the world reopen after lockdown. Also, the rupee is depreciating against the dollar, despite India’s foreign exchange reserves being at a historic high.

But the main cause is the ridiculously high taxes on fuel in India. While the international prices of crude oil were falling drastically, the BJP-led central government was busy increasing fuel taxes to earn more revenue. The central and state governments together now collect about 256 per cent tax on diesel and 250 per cent tax on petrol.

The base price of fuel in India is ₹24.62 per litre for petrol and ₹26.04 per litre for diesel. Excise duty plus road cess (central government taxes) adds ₹32.98 to every litre of petrol and ₹31.83 to every litre of diesel. Dealer commission is ₹3.60 per litre of petrol and ₹2.53 per litre of diesel. VAT (state government tax) and transport charges add another ₹15.70 to the price of petrol and ₹14.73 to the price of diesel, to give you the petrol pump rate you pay of ₹76.90 per litre for petrol and ₹75.13 for diesel in North Goa.

The taxes you pay are two-and-a-half times the actual cost of fuel!

On 5 May, the central government increased excise duty and road cess by ₹13 per litre on diesel and ₹10 per litre on petrol – the steepest single-day hike in taxes on fuel ever – making India the country with the highest taxes on fuel in the world. Over 69 per cent of the money you pay for your petrol or diesel is taxes; only 31 per cent is the actual cost of the fuel. Italy claims the second spot in taxation, with 64 per cent tax. France and Germany are at 63 per cent. It's 62 per cent in Britain, 53 per cent in Spain, 47 per cent in Japan, 33 per cent in Canada and 19 per cent in the USA.

When questioned by the media about this absurdly high rate of taxation, Union Petroleum Minister Dharmendra Pradhan said that the Centre is taking a “cautious and conscious approach” of ensuring “a balance in fuel prices”, so as to use the funds generated for its social welfare programmes to benefit the poor.  

Let us remember, however, that this country’s transport systems and supply chains run on diesel. Any increase in the price of diesel results in an increase in the prices of travel, as well as of each and every commodity, including essentials. The money generated by these taxes comes from the pockets of each and every Indian, including the poorest of the poor. In India, this means most of this money comes from the lower middle class and the poor, who are the overwhelming majority of the population.

Does this not seem like robbing Peter to pay Paul?

Disclaimer: Views expressed above are the author's own.

Blogger's Profile

Ashwin Tombat

Ashwin Tombat has been the Editor of Gomantak Times and Herald. Worked as an Associate Editor of national magazine Gentleman in Mumbai, before shifting to Goa. Loves sailing, also participates in Marathons. Has worked as an activist in students's union and trade unions in Maharashtra. Also an artist of Street Theatre during student days.

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