Petrol and diesel prices hit a two-year high in mid-December 2020. Petrol is well above Rs. 80 a litre while diesel is getting there.
The fact that crude oil - the fountainhead of these fuels - is still below 2018 levels highlights the role of petrol and diesel pricing policies of the government.
What is the fuel pricing mechanism?
The price of petrol and diesel in India is not determined by the actual costs incurred by PSU refiners.
These include crude oil sourcing, refining and marketing costs incurred by Indian Oil, HPCL and BPCL.
Rather, a formula named the trade parity price (TPP) is used to price these products.
It assumes that 80% of petrol and diesel is imported into India and 20% is exported.
So, petrol and diesel prices in India are determined based on prices of these fuels in the international market and not on the basis of crude oil prices.
The international petrol and diesel prices generally move in line with crude oil prices.
But it need not always be the case, given that demand and supply dynamics could be different.
The TPP in dollars is converted to rupees. Then comes other costs and margins of the oil companies, dealer commission and taxes.
From mid-June 2017, the pricing of petrol and diesel is done through a ‘daily pricing’ mechanism, based on a 15-day rolling average international rate.
So, time lag has an effect too.
Further, the weakening of the rupee against the dollar over the years has added to the fuel’s cost.
What role do taxes play?
Petrol and diesel are government’s good source of revenue.
During the crude crash earlier in 2020, a cash-strapped Centre raised excise duty on petrol and diesel by Rs. 13-16 a litre.
Many States too increased their sales tax/VAT.
But when oil prices started rising, the taxes were not rolled back.
So fuel prices increased, and customers bore the brunt.
Notably, taxes now account for about 60% of the fuels’ price.
Besides pricing mechanism and taxes, there are unexplained pauses to price changes, leading to opacity in pricing.
E.g. For more than 80 days between March and June 2020, the fuels’ prices were frozen when they should have actually fallen.
What are the concerns?
India imports most of its oil needs but is more than self-sufficient in petrol and diesel production.
So, the trade parity pricing mechanism has often been criticised, especially since petrol and diesel are ‘decontrolled’ fuels.
The complaints include allegations of cartelisation with the three PSU oil companies charging nearly the same price, despite different cost structures and efficiencies.
Cartelisation means a group of industry participants coming together to fix pricing of products and services. This may work against the interest of consumers.
Transparent pricing, based on market principles, will likely help consumers more.
What is the significance?
Higher petrol and diesel prices don’t just mean higher personal transport costs.
They could also cause a price spike in a host of goods and services, given that these fuels play a big part in running the economy.
