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Theoretically, retail prices of petrol and diesel in India are linked to global crude oil prices. This means that if crude oil prices fall globally, retail prices should come down too and vice versa. However, India has a peculiar oil price dynamics. When global oil prices go up, this burden is passed on to the consumer, who must shell out more for every litre of fuel consumed. But when the reverse happens and prices go down, the government by default, slaps fresh taxes and levies to ensure that it rakes in extra revenues. For the month of June, fuel prices stood at a four-and-a-half month high over a 21-day period starting from the June 7 to June 28 even as global crude oil rates slumped below the $40 per barrel mark.  

 India's position

As India started gradually lifting the lockdown, the period between June 7 to June 16 witnessed a cumulative rise in petrol and diesel prices by Rs 5.47 and Rs 5.80 respectively. Now, the main reason behind oil companies resorting to price hike is the increased excise duty on fuel in May 2020 by the central government to make up for its revenue losses during the three phases of strict lockdown. The central government increased the excise duty on a litre of petrol and diesel by Rs 10 and Rs 13 respectively. Of this, ` 8 will come under road and infrastructure cess while the remaining will account for special additional excise duty.

Given the lockdown and the resulting meltdown of demand in the country, the Oil Marketing Companies (OMCs) refrained from increasing the fuel prices during the lockdown phase. But now, with India entering the Unlock 1.0 phase, there is a surge in fuel demand. Oil companies are now using this as an opportunity to pass the impact of hiked excise duty on to the consumers resulting in a hike in petrol and diesel prices as experienced in the 21-day period between June 7 to June 28. Moreover, this price keeps varying across states given that states have their own fuel taxes on top of this.

There was no hike in the prices of petrol and diesel in the metro cities on June 28, marking a pause after 21 consecutive days of escalation. In Delhi, the price of petrol remained unchanged at Rs 80.38 per litre and diesel was untouched at Rs 80.40 per litre as it was on June 27. On June 28, the prices in the other metro cities of Chennai, Mumbai and Kolkata remained the same as it was on June 27.  In the following week beginning on June 28, for metro cities, prices negligibly increased with the weekly closing price being Rs80.43 for petrol and Rs 80.53 for diesel in Delhi; Rs 87.19 and Rs 78.83 for petrol and diesel respectively in Mumbai; Rs 82.10 and Rs 75.64 for petrol and diesel respectively in Kolkata and Rs 83.63 and Rs77.72 for petrol and diesel respectively in Chennai. This rise is going to continue in a stop-start manner. Why? The answer follows.

Induced price rise

The sharp rise in fuel taxes is a result of government obligation. Revenues earned from GST are falling, hard hitting both the central as well as the state governments. GST revenues in the first quarter of 2020-21 (when Covid had already set in) were 41% lower compared to the same period in the previous year. Moreover, since both the Union and the state governments can quickly raise fuel rates on their own – rather than having to take a collective decision for GST – this might be an easier option for them at this time of crisis. The option of taxing fuels to offset the ongoing economic crisis caused by the lockdown is lucrative as petrol and diesel sales have risen sharply in June — by 36% and 20% respectively as compared to May, making this revenue earning source for both the central government and the state governments amid the pandemic more viable. But there is a concern with regard to inflation. Given fuel is such a critical input for any economy, its prices rising usually means an increase in prices for a host of other goods and services, leading to greater inflation across the economy. 

However, the current Indian economy is in an unusual place due to the relatively low demand as the economy is yet to come back to normal which indirectly serves to ease pressure on inflation. So, a rise in retail fuel prices that might usher in inflationary pressures will be to a certain extent offset by this relatively low demand as Reserve Bank of India has pointed out in its May Monetary Policy Committee brief. There will be a marginal impact on inflation levels under this scenario.

The author is the Assistant Professor, Department of Economics, Faculty of Commerce and Management Studies of St. Xavier’s University, Kolkata.