Latest data show that the incremental rise in petrol prices in the last 17 days may continue for some more time. However, with the crude oil prices softening from the highs recorded in March, and the exchange rate improving slightly, the degree of the rise in retail petrol prices may reduce in the coming days. But meaningful reduction in retail prices can only be expected if the government cuts the Centre’s excise duty component further.
In the last 17 days, the retail petrol prices were revised upwards 14 times. From ₹95.41 on March 21, the retail petrol price in Delhi increased to ₹105.41 by April 7 (Chart 1). In other metros such as Mumbai, Kolkata and Chennai, the prices reached record levels of ₹120.51, ₹115.12 and ₹110.85 per litre, respectively, depending on the State’s taxes.
Why are the prices rising?
After Deepavali on November 4, 2021, the price of petrol did not increase for over 138 days until March 22. Around Deepavali, the central excise duty was cut. This was later followed up by a reduction of Value Added Tax (VAT) in some States. After these two tax cuts, the retail petrol prices stayed put for a long time, likely owing to the Assembly elections in five States: Uttar Pradesh, Punjab, Goa, Manipur, and Uttarakhand.
The excise duty cut in November became necessary as crude oil prices were rising at the time. Between September and November last year, crude oil prices (Indian basket) increased from $70.6/barrel to $83.6/barrel (Chart 2). And this had an impact on the retail price, which increased from ₹101.34/litre to ₹109.69/litre during that period in Delhi (Chart 5). The tax cuts brought the price down to ₹95.41 and the retail price stayed put thereafter.
However, after January 2022, crude prices soared again and the exchange rate fell, driving up import costs. Between January and March 2022, crude prices (Indian basket) increased from $77/barrel to $102/barrel. They peaked at $128/barrel on March 9. On March 24, crude prices recorded a relatively smaller peak of $117. During that period, the exchange rate also weakened from ₹74.51 to ₹75.81 (Chart 3).
Thus, from January, while crude prices increased and the exchange rate fell, retail petrol prices stayed put, most likely due to the Assembly elections, leading to an imbalance. Oil marketing companies were possibly informally asked not to increase the retail prices and bear the additional costs during this period. And therefore, to correct this imbalance, the retail prices have been raised several times after March 22.
When will this trend abate?
The current retail prices in Delhi have not yet reached the highest level recorded before the excise duty cut in November 2021 (₹110 per litre). So, the retail prices may not immediately start plateauing.
Another factor to be considered is that on November 4, when the excise duty was cut, crude prices (Indian basket) were around the $80 mark, whereas currently they continue to be above the $100 mark. But they are not as high as $128 or $117 per barrel, as was the case at various points in March.
The exchange rate has also improved in the last five days (Chart 3), from ₹75.81 to ₹75.60. So, while the extent of increase in retail prices may slow down in the immediate future, a levelling off or reversal in the price trend cannot be expected.
High taxation
The Centre’s excise duty component continues to form about 27% of the retail petrol price in Delhi. That is, for every ₹100 worth of petrol filled in the stations, the customer is paying a Central tax of about ₹27. Back in 2014, the Centre’s tax share was only 14%. Since then, whenever crude prices have crashed, the government has increased the Centre’s excise duty in proportion to the drop and has not passed on the benefits to the customers.
Given that the crude prices are still high, any meaningful decrease in the retail prices can be achieved only if another round of excise duty and VAT cuts is implemented.
Chart appears incomplete? Click to remove AMP mode
With inputs from Jasmin Nihalani
Source: PPAC, IMF
Also read: Data | An accrued price: What determines the high costs of retail fuel in India?
