The petrol price hike is the most discussed topic when it comes to the automotive industry. In the past 15-30 days, the price hike has been quite significant and a lot of major cities have seen petrol prices go above the Rs 100 mark. Is there any way the fuel prices can be reduced? What affects fuel prices? Why doesn’t international crude oil price affect fuel prices in India? You will find the answer to all of these questions in this article. Also if you have any questions do let us know in the comments below.

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Price Increase analysis

Fuel prices have surged 24 times since May 4 and if you consider June alone they have been revised eight times. Mumbai has become the first metro city in the country to sell petrol at Rs 100 on 29th May whereas Bhopal became the first state capital to cross the Rs 100 mark on May 12. Petrol is at Rs 102.88 in Mumbai and Rs 104.91 in Bhopal. There is a significant growth in the petrol prices but we do not see any drop even though there was a drop in the crude oil prices. To understand this better you need to go through how the fuel prices are determined which would give you a better insight on why there is a petrol price hike.

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How is the price decided?

Eight elements affect the prices of petrol. The base price is the price that refineries charge to refine petrol from crude oil. Then the freight charges are added after which petrol is sold to dealers without excise duty and VAT. Then the dealer charge is added which ranges from Rs 2 to 4. After which the state government adds VAT whereas the central government adds excise duty. These taxes are 180% of the fuel price. Now if you compare these taxes with other countries abroad then you would understand that these are quite high as Germany levies 65% tax whereas the US only at 20% tax.

Also, understand that because the taxes are so high, fuel has become the revenue-generating source for the government. There have been revisions in the central excise duty which has changed from Rs 19 at the start to Rs 32 by the end of 2020. A maximum VAT of 30% is levied by certain states in India.

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Delhi price breakdown as of 16th June 2021

  • Base price – Rs 39.90
  • Freight charges – Rs 0.33
  • Excise duty – Rs 31.80
  • Dealer commission – Rs 2.59
  • VAT – Rs 12.79
  • Total price – Rs.97.41

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Why does it not go down?

An obvious question that pops into your mind when you think is that why doesn’t the base price goes down when the barrel price falls. Another base price is decided based on a complicated formula that uses 80:20 logic. Although crude oil is imported based on the barrel price the price of fuel is determined based on the international average price and the price that India will set as an exporter of fuel. The average price is considered 80% and though exporting price is considered as 20%.

The prices are revised based on the daily pricing system which was introduced in 2017. Before that price used to be revised every 15 days. The daily price has been set according to the 15-day average international rate. Under this, the prices are set according to international fuel price and currency exchange rate.

Now the oil marketing companies have the right to freeze the revision in fuel price for a set number of days. So when the prices start to fall they freeze up the base fuel price so the drop is not transferred to the customers. This is the reason why fuel prices continue to go up but the drop is not transferred to the customers.

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How can prices go down?

The most viable solution here is to shift fuel under goods and service tax. The government continues to get a higher revenue if it is kept under the excise duty and VAT system. This money is directly used for social welfare programme and relief work. The government uses this as revenue money and there is no place to question its use. The rise of fuel prices affects the economy drastically as it directly increases the transportation cost which is levied upon almost all goods. The government is now planning to shift to an increase in the ethanol blend in fuel. Under the biofuel policy of 2018, the target for 2030 is set for 20% ethanol in petrol and 5% ethanol in diesel.

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Overall if we look at this problem it can be solved in two main ways which are not in our hands as customers. If you have car buying doubts click here to ask! Get the lowest price for car insurance here. For more such content stay subscribed to MotorOctane Youtube, Google News Facebook and Twitter. Also, follow us on Flipboard and Reddit where we have a discussion community.


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