Petrol, diesel prices: Why govt, oil companies are finding it difficult to control spike


Prices of essential commodities, including edible oil and vegetables, have skyrocketed after petrol and diesel rates were increased by oil marketing companies on successive occasions. The rising prices of Compressed Natural Gas (CNG) in the National Capital Territory (NCT) of Delhi and Mumbai have also worsened the situation.

The Reserve Bank of India (RBI) on Friday raised the retail inflation projection for the current financial year to 5.7 per cent on the back of rising global prices amidst ongoing geo-political tensions. In its earlier policy review in February, the RBI had projected retail inflation to be at 4.5 per cent in fiscal 2022-23.

“Global food prices along with metal prices have hardened significantly. Economy is grappling with a sharp rise in inflation… Inflation is now projected at 5.7 per cent in 2022-23 with Q1 at 6.3 per cent; Q2 at 5 per cent; Q3 at 5.4 per cent and Q4 at 5.1 per cent,” RBI Governor Shaktikanta Das said while unveiling the first monetary policy review for the current fiscal year.

Opposition parties have targeted the government over the rise in the rates of petrol, diesel, cooking gas and vegetables and asked it to control prices.

STICKY WICKET

While it is necessary to stem the spiraling fuel rates in order to bring down prices of essential commodities, the government is on a sticky wicket to go for an excise duty cut which will cost the exchequer several crores and widen the Centre’s fiscal deficit. Fiscal deficit denotes a shortfall in the government’s income compared with the spending.

The revision of petrol and diesel prices has not been done on Thursday and Friday. This comes as a relief after fuel rates were increased 14 times since the ending of a four-and-half-month long hiatus in rate revision on March 22. In all, petrol and diesel prices have gone up by Rs 10 per litre each or 10.5 per cent since March 22.

The increase in retail rates was necessitated as crude oil prices rose during the 137-day hiatus which put a financial burden on state-owned fuel retailers – Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL).

INTERNATIONAL OIL PRICES

India is 85 per cent dependent on imports for meeting its oil needs and so retail rates adjust accordingly to the global movement.

Following Russia’s invasion of Ukraine international crude oil prices hit a peak of $139 per barrel in early March this year. Rates have dropped far more steeply as Brent crude futures were steady at $100.73 per barrel on Friday. This means a litre of brent crude costs around Rs 48 on Friday.

However, petrol and diesel prices were on a freeze since November 4, ahead of the assembly elections in five states, including Uttar Pradesh. During the period, the cost of crude oil soared by about $30 per barrel.

Credit rating firm Moody’s Investors Services last month stated that state retailers together lost around $2.25 billion (Rs 19,000 crore) in revenue for keeping petrol and diesel prices on hold during the election period, as per a PTI report.

Oil companies “will need to raise diesel prices by Rs 13.1-24.9 per litre and Rs 10.6-22.3 a litre on gasoline (petrol) at an underlying crude price of $100 to $120 per barrel,” PTI reported quoting Kotak Institutional Equities.

Crisil Research said a Rs 9-12 per litre increase in retail price will be required for a full pass-through of an average $100 per barrel crude oil and Rs 15-20 a litre hike if the average crude oil price rises to $110 to $120, PTI reported.

STATE TAXES

Prices we pay for buying petrol and diesel across India include central and state taxes. State governments levy value-added tax (VAT) on petrol and diesel. The percentage of VAT is decided by the respective state governments and this is the reason why petrol and diesel prices vary from state to state.

A few days back, while talking about high petrol and diesel prices, NITI Aayog Vice Chairman Rajiv Kumar said that given the global situation, fuel rates were rising across the world.

“In the past, the government had taken steps to reduce the tax burden. And I think it’s time now for the states to come forward if they feel that this is required to be done,” he said.

Kumar assured that the government was keeping a close watch on prices of all commodities including fuel and would take steps as necessary.

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