The global crude oil prices coupled with steep tax rates continue to drive the increase in fuel price to the end consumer. The increase is evident from the fact that when compared to 2014-15 when the BJP government was formed, the revenue from central excise duty on petrol increased by more than 3 times and on diesel increased by more than 5 times.
The current prices of Petrol & Diesel across the country are unprecedented. A significant hike in the Central excise duty on 06 May 2020 has contributed to a steep increase in the cost of Petrol & diesel, as global crude oil prices increased. Since VAT/Sales Tax in most states is levied ‘ad valorem’, any increase in the global crude prices drive up the end consumer price.
The gradual increase of prices of the Indian Basket of Crude oil from the beginning of 2021 to pre-pandemic levels has aggravated the situation. In this context, we look at the trends over the past few years with respect to the increase/decrease in the price of fuel, revenue earned by the government through excise duty, price of the Indian basket of crude among other things.
The current price of crude oil is at the 2018 level
In an earlier story, we had highlighted that 89% of India’s crude oil requirement in 2019-20 is through imports. As per the information provided by PPAC, an increasing trend is observed in the volume of Crude-oil imported, which is commensurate with the increasing demand.
The increase in imports indicates India’s increasing reliance on crude oil imports. Furthermore, the prices of petrol & diesel have been made market-determined effective from 26 June 2010 and 19 October 2014, respectively. Hence, changes in the price of crude oil in the international market significantly influence the domestic end consumer price in addition to the central & state tax regime.
The Indian Basket of Crude-oil is a derived basket comprising of Sour grade (Oman & Dubai average) & Sweet grade (Brent Dated) of crude oil processed in Indian refineries. Post the onset of the COVID-19 pandemic, there was an unprecedented fall in the global crude oil prices. Accordingly, the price of the Indian Basket of Crude-oil also fell steeply during this period. Responding to a question in Lok Sabha, the Government of India has furnished the details of the prices of India’s basket of crude oil since April 2018. During February 2020, the price fell to $ 54.63 per barrel (bbl) from $ 64.31 bbl in January 2020. The crude-oil prices fell further to $ 33.36 bbl & $ 19.9 bbl in the ensuing months of March 2020 & April 2020. Since then, there has been a gradual increase in the price of the Indian basket of Crude-oil.
In particular, the price has begun to increase since the beginning of 2021. The price increased from around $ 54.79 bbl in January 2021 to $ 74.36 in July 2021. The prices are back to the levels of May-June’2018. The steep increase is evident from the fact that in just about 15 months between April 2020 and July 2021, the price went up by almost four-fold.
Steep hike in Central Excise duty during May 2020 is a key contributor to increased fuel prices
Apart from the price of Crude-oil, there are other variables that influence the final price of Petrol & Diesel to the end consumer. In addition to the increase in the price of crude oil, central & state taxes are responsible for the increased prices. In particular, the central excise duty, which is a fixed amount unlike state VAT is a key driver in increased prices.
The Central excise duty is levied by the Central government and forms one of the major components of the final fuel price. The excise duty is modified by the Central government as it deems fit. Though the global crude oil prices reached the lowest levels during March-April 2020, the Indian consumer did not benefit that much because of a steep hike in the Central Excise duty on petrol & diesel on 06 May 2020. The Central Excise duty on Petrol increased from Rs. 22.98/litre to Rs. 32.98 /litre while on diesel, it increased from Rs.18.83/litre to Rs. 31.83/litre. In other words, the central excise duty on petrol was increased by around 44% and on diesel was increased by around 68% in one go. The excise duty was revised after the introduction of the ‘Agriculture Infrastructure Development Cess’ (AIDC) in February 2021 and was reduced by a mere 8 paise in the case of petrol and 3 paise in the case of diesel.
During 2021-22, the price of Petrol increased 39 times and decreased only once so far
We had earlier noted that the prices of petrol & diesel are now de-regulated and are market-determined. Accordingly, based on the market trends, the prices of petrol & diesel were revised periodically. However, effective from 16 June 2017, daily pricing of petrol & diesel was implemented for the entire country. Responding to a question in Lok Sabha in July 2021, the government provided details of the number of days when the fuel prices changed since 2018-19 in Delhi.
As per the information provided, during 2018-19, there was a hike in petrol price on 148 days compared to a decrease on 112 days. Similarly, in the case of Diesel, the price was hiked on 140 days and was decreased on 118 days. The trend differed during 2019-20. The price of Petrol increased on 89 days in 2019-20 while in the case of diesel there was an increase on 79 days. The number of days the fuel prices decreased was comparatively higher for both Petrol & Diesel with 124 & 119 days respectively. Meanwhile, the prices did not change on 153 & 168 days respectively for Petrol & Diesel in 2019-20.
However, there is a shift in this trend in the ensuing years. During 2020-21, there was an increase in a greater number of days compared to the number of days when the prices decreased. In the case of Petrol, the price increased on 76 days, while it decreased only on 10 days. There was no change on 279 days. Similarly, even in the case of Diesel, the price increased on 73 days compared to a decrease on 24 days.
As can be observed from the data, the proportion of days the price remained unchanged has increased than earlier. However, the number of days when the price increase is considerably more than the number of days when the price decreased compared to the previous years. This trend sustained in the current year as well (2021-22). For 104 days (as of 13 July 2021), the price of petrol increased on 39 days, while it decreased only on one day. While in the case of Diesel, it increased on 36 days and decreased on only 2 days.
Revenue from Central Excise duty on Diesel more than doubled in 2020-21
The steep increase in the Central excise duty on petrol & diesel in May 2020 is reflected in the increased revenue from Central excise duty in 2020-21. As per the information provided in the Lok Sabha in July 2021, a total of Rs. 2.33 lakh crores were collected as Central excise on Diesel for 2020-21. This is more than twice the amount collected in 2019-20 when it was Rs. 1.12 lakh crores. As per the data available since 2013-14, this is the highest collection of Central Excise duty on petrol & diesel ever.
Compared to 2014-15 when the BJP government was formed, the revenue from central excise duty on petrol increased by more than 3 times and on diesel increased by more than 5 times.
Recent trends indicate an increased reliance on revenue through a hike in Fuel
In one of our earlier stories, we had observed that the increase in the revenue from Central excise duty on fuel was able to compensate the deficit in the tax revenue in 2020-21. Such increased reliance on revenue from duties on fuel means that they may not be included in the GST regime anytime soon. If the trend in the last few months is any indication, the consumer is in for an extended period of increased prices unless there is an immediate reduction in excise duties. Since the state VAT/sales tax in most cases is ‘ad valorem’, any reduction in central excise will automatically reduce the amount of state VAT.