2020-06-28 21:34:00

Petrol and diesel prices went up every day since 7 June. In Delhi, the price of petrol was hiked by 9.12 per litre between 7 June and 26 June, while that of diesel has gone up by 11.01 per litre. Other cities have seen a price rise as well. Why is this the case? Mint takes a look.

What’s the immediate reason for the hike?

On 28 April, the price of the Indian basket of crude oil had fallen to as low as $16.19 per barrel. The average price of crude oil in April stood at $19.9 per barrel. Since then, the price of oil has risen. It averaged at $30.60 per barrel in May. On 25 June, the price was at $40.66 per barrel. Basically, the price of crude oil has doubled in a period of around two months, as international demand for crude has picked up pace, with the easing of lockdown curbs. For a little over one month up to 6 June, petrol and diesel prices were not increased. They have been going up since then, reflecting the higher price of oil.

Are there any other short-term reasons?

As of 1 April, the total excise duty on petrol added up to 22.98 per litre. The duty currently stands at 32.98 per litre. When it comes to diesel, the total excise duty on the fuel was at 18.83 per litre. The duty currently stands at 31.83 per litre. With the economic activity crashing on the back of the covid-induced lockdown, central government tax revenues took a big beating. Hence, the excise duty on petrol and diesel since then has been increased by 10 per litre and 13 per litre, respectively. Basically, the central government has captured the entire fall in oil price, without passing on the benefit to the consumer.

Tax effect

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Tax effect

What are the long-term reasons for the price rise?

The gross tax revenue collected by the government increased from 9.98% of the gross domestic product (GDP) to 11.22% in 2017-18. A major reason for this rise was an increase in central government taxes on petrol and diesel (primarily excise duty). In 2013-14, the money earned through taxes levied on fuel had stood at 46,386 crore. This jumped to 2,23,922 crore by 2017-18.

How is this connected to the current hike?

In May 2014, the price of oil averaged at $106.85 per barrel. The price of petrol and diesel in Delhi was at 47.12 per litre and 44.98 per litre, respectively. The central government taxes on petrol and diesel were at 10.39 per litre and 4.50 per litre, respectively. As oil prices fell in the second half of 2014, the government increased taxes on fuel. Having figured out this formula, it was put to use again, once economic activity and oil prices crashed, and went below $20 per barrel in April.

How  big  a  role  did  covid play in the price hike?

Covid-19 forced the government to increase the excise duty on petrol and diesel sharply. But one needs to remember  that  gross  tax  revenue in 2019-20 had fallen to 9.88% of the GDP, thanks to the badly implemented goods and services tax (GST) and the ill-effects of demonetization. Hence, if the world hadn’t been hit by covid-19, the government would still have had to increase the excise duty on petrol and diesel, though the hike wouldn’t have been so massive.

Vivek Kaul is the author of Bad Money.

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