Fuel prices have gone up sharply to the extent that in cities like Mumbai people have consciously reduced private travel and resorted to public transport. Petrol is already above Rs.80/litre and diesel is closing in. In the last few days, the crude oil prices have come down from $86/bbl to $69/bbl and that has partially helped the prices to stabilize. To understand the reason Indian prices are high, one needs to understand the structure of how the price of diesel and petrol is calculated in India. That will clarify a lot of things.
How is the retail price of petrol and diesel arrived at India?
Particulars of Fuel Price Calculation
Diesel Price Calculation
Petrol Price Calculation
|International Price of Crude Oil with Ocean Freight (as on 1st October 2018)||85.5 $ or Rs 6196 per Barrel||85.5 $ or Rs 6196 per Barrel|
|1 Barrel of Crude Oil||159 Litre||159 Litre|
|Crude Oil – Cost per Litre||Rs 38.97 per Litre||Rs 38.97 per Litre|
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|Basic OMC Cost Calculation || || |
|Entry Tax, Refinery Processing, OMC Margin, Freight Cost||Rs 3.82 per Litre||Rs 7.25 per Litre|
|Basic Cost of Fuel after Refining Cost||Rs 42.79 per Litre ||Rs 46.22 per Litre |
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|Additional: Excise Duty + Road Cess as Charged by Central Government||Rs 19.48 / Litre on Petrol||Rs 15.33 / Lit on Diesel|
|Pricing Charged to Dealers before VAT||Rs 62.27 per Litre||Rs 61.55 per Litre|
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|Calculating Dealer Retail Price – Base Location Delhi|| || |
|Commission to Petrol Pump Dealers||Rs 3.66 per Litre||Rs 2.52 per Litre|
|Fuel Cost Before VAT (rounded off for approximation)||Rs 65.93 per Litre||Rs 64.07 per Litre|
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|Additional: VAT (Varies from State to State – 27% on Petrol & 16.75% on Diesel + 25p as Pollution Cess with Surcharge)||Rs 17.8 / Lit on Petrol||Rs 11.02 / Litre on Diesel|
|Final Retail Price as on 1st October 2018 -(calculation)||Rs 83.73 per Litre||Rs 75.09 per Litre|
What needs to be understood in the above calculation is that these prices as of early October and will keep changing from time. However, this will broadly help you to understand the pricing logic for diesel and petrol in India. Let us take the case of petrol first. The landed cost of crude is determined in dollars and hence if the dollar appreciates and the rupee weakens then automatically the price of fuel will go up in India. That is because the landed cost will go up. But even at current exchange rates, the total cost of importing crude and refining to make into petrol and diesel is just about the half the price it is sold at now. Then what explains the markup of nearly 100% on these prices. Unlike what is believed, the dealer margins account for less 5% of the total cost of petrol. So the 100% mark up is actually coming in the form of central and state taxes.
Can the government control the price of petrol and diesel?
There are some factors that are uncontrollable and some that are controllable. Let us look at the specific factors and how the government can act upon it.
The landed cost of crude and the exchange rate are outside the control of India and are determined by global factors. However, the government can keep its CAD and fiscal deficit in check which will protect the rupee from depreciating too much. The government has started to build a strategic reserve of oil to stabilize internal prices but that is too small to be material. This will continue to be a problem.
Central excise duties imposed by the center account for 25% of the landed cost of petrol. When crude prices were falling, the government has used higher excise duties to skim most of the profits of lower oil prices. With the government under revenue strain and the fiscal deficit under strain, this is unlikely to change.
Then we come to the aspect of state taxes and VAT which accounts for another 25% of the cost of the final litre of petrol and diesel. Remember, oil was kept out of GST to pander to the states for whom oil duties was a major source of revenues. With state fiscal deficit nearly 5% of GSDP, that is also unlikely to change.
In a nutshell, lower prices of diesel and petrol will predicate on global crude prices and the rupee-dollar equation only. Duties are unlikely to be relaxed in a hurry. People need to get prepared for a prolonged phase of higher fuel prices