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The Big Picture – Petrol & Diesel Prices: Are consumers deprived of full benefit?

The rapid fall in crude oil prices over the last few months, with the barrel price coming down to around 70 US$/barrel, has resulted in a welcome fall of prices of Diesel and Petrol in the country.

However accompanying the reduction in diesel and petrol prices have been 2 excise duty hikes in the last two weeks.

Though the government has said that the hike in excise duty will not be passed on to the consumers and will be absorbed by all companies, some questions remain.

There is no complete decontrol of petrol and diesel in our country.

We are not in a completely market price regime.

Petrol prices were decontrolled in 2013.

It is being said that the full benefit of fall in prices has not been passed on to the consumers.

Repo rate has not been reduced by the RBI due to uncertainties existing in this sector.

Diesel has been creating the cascading effecting for the inflationary pressures in the economy.

Petroleum/Diesel prices in India have three components:

  • Crude oil
  • Refining cost and distribution cost
  • Government taxes

The biggest distortion in our price mechanism is that we have applied a notion called import parity. We Import crude oil but parity is imposed at the level of refined products.

It is also being said that the government is mopping up revenues through these excise duties.

The taxes on petrol and its products are imposed on ad valorem basis. And custom duties are also levied on ad valorem.

Roughly 40% of the custom collections are coming from the petroleum sector.

Although the international prices are dropping, the entire benefit is not being passed on to the consumers.

The decline in oil prices also reflect the ongoing international economic recession and indicate that the demand is not so strong.

The burden of the hike on excise duties is being passed on to the companies.

Oil companies still work on the signals of the government.

Experts suggest that the extra revenue being generated by the government should be saved for the difficult times.