# Why Indians Pay Such a High Price for Petrol and Diesel

At the end of every month, the Controller General of Accounts (CGA) declares the revenue and the expenses of the central government up until the last month. Hence, on September 30, the CGA declared the revenue and the expenses of the central government between April 1 and August 31.

Take a look at the following chart. It plots the decrease in gross tax revenue between April and August 2020 in comparison to the same period in 2019. The major taxes collected by the central government are income tax that you and I pay, corporate tax (income tax paid by corporates), customs duties, central goods and services tax, goods and services tax compensation cess and excise duties.

They all fall down

Source: Centre for Monitoring Indian Economy.

As can be seen in the above chart, the collections of all taxes have come down. The gross tax revenue is down 23.7% to Rs 5.04 lakh crore. Only one tax and that is excise duty, has grown during the course of this year. The growth is a huge 32.05% to Rs 1 lakh crore.

Given the economic contraction this year, it is hardly surprising that tax collections have crashed. The question is how has the collection of excise duties increased by almost a third?

This is primarily because of the central government increasing the excise duty it charges on petrol and diesel. This has been done twice in 2020. First in March and then again in May.

The excise duty on petrol stood at Rs 19.98 per litre, when it was increased by Rs 3 per litre in March and then again by Rs 10 per litre in May and now stands at Rs 32.98 per litre. When it comes to diesel, the excise duty on it stood at Rs 15.83 per litre in March. It was increased by Rs 3 per litre in March and Rs 13 per litre in May.

Take a look at the following table. It provides the price build up of petrol in Delhi as of March 1 and as of October 1.

High and low.

Source: Indian Oil Corporation.

This table makes for a very interesting reading. Let’s first understand how the mathematics of this works out using the data as of October 1.

The price charged to dealers is Rs 25.68 per litre. On this, the central government charges an excise duty of Rs 32.98 per litre. There is a dealer commission of Rs 3.69 per litre. Adding the price charged to dealers (Rs 25.98), the excise duty (Rs 32.98) and the dealer commission (Rs 3.69), we get a price of Rs 62.35 per litre. On this the local Delhi government charges a value added tax of 30%. This works out to Rs 18.71 per litre in this case.

Adding the value added tax, we get the retail selling price of Rs 81.06 per litre. The maths for the price as of March 1, works similarly, the difference being in the numbers and the taxes.

In March, the price of Indian basket of crude oil was around \$55 per barrel. The latest price of the Indian basket of crude oil is around \$41 per barrel. This is reflected in the fact that the price charged to dealers as of October 1, stood at Rs 25.68 per litre, lower than the Rs 32.93 per litre charged in March.

Despite the higher price charged to dealers, the retail selling price of petrol in March was at Rs 71.71 per litre as against Rs 81.06 per litre in October. The price as of today is 13% higher than that in March.

What’s happening here? Let’s take a look at it pointwise.

1)  The total excise duty on petrol was at Rs 19.98 per litre in March. It has since gone up to Rs 32.98 per litre, Rs 13 per litre extra. This adds to the retail price.

2) The value added tax charged by the Delhi government has also increased from 27% to 30%. This also adds to the retail price though not as much as the increase in excise duties.

3) As of March 1, taxes amounted to Rs 35.23 per litre (excise duties + value added tax). This was against a price charged to dealers of Rs 32.93 per litre. Taxes amounted to 107% of the price charged to dealers.

As of October 1, taxes amount to Rs 51.69 per litre (excise duties + value added tax). This is against a price charged to dealers of Rs 25.68 per litre. Taxes now amount to 201% of the priced charged to dealers. This explains the higher retail price of petrol, despite the lower price charged to dealers, thanks to a lower oil price.

4) There is another way of looking at this data. In March, the total taxes amounted to around 49% of the retail price. In October, they amount to around 64% of the retail price. There has been a substantial increase in taxes.

5) The reason behind this increase is that the central government needs to meet its expenditure from somewhere. One point that often gets made on the social media is that the central government shares the increase in excise duties with the state governments. This isn’t totally true.

In May, the excise duty on petrol was hiked by Rs 10 per litre. Of this hike, the hike in road and infrastructure cess (additional excise duty) was Rs 8 per litre. Given that this is a cess, it need not be shared with the state governments. Hence, the bulk of the increase has stayed with the central government.

Now let’s take a look at diesel pointwise. In this case, I am taking diesel price in Delhi as of February 12. I couldn’t find the data for March 1. But the logic remains entirely the same.

1) The price of diesel as of February 12 was Rs 64.87 per litre. As of October 1, it stands at Rs 70.53 per litre. This despite lower oil prices.

2) The total excise duty on diesel back then was Rs 15.83 per litre. Currently, it stands at Rs 31.83 per litre. This has added to the price of diesel.

3) As of February 1, the price charged to dealers was Rs 36.98. The excise duty was Rs 15.83 per litre. The value added tax worked out to Rs 9.56 per litre. Hence, total taxes (excise duty + value added tax) worked out to Rs 25.39 per litre or around 69% of the price charged to dealers.

As of October 1, the excise duty is at Rs 31.83 per litre whereas the value added tax works out to Rs 10.37 per litre. Hence, total taxes work out to Rs 42.2 per litre or 164% of the price charged to dealers.

4) Total taxes amounted to 39% of the retail price in February. They now work out to 60%.

5) In May, the excise duty on diesel was hiked by Rs 13 per litre.  Of this hike, the hike in road and infrastructure cess (additional excise duty) was Rs 8 per litre. Given that this is a cess, it need not be shared with state governments. Hence, the bulk of the increase has stayed with the central government.

This explains why you and I are paying a higher amount per litre of petrol and diesel, despite oil prices being lower from the time the covid-pandemic struck. Also, it needs to be mentioned here that the consumption of petroleum products has fallen every month between April and August. The following chart plots the same.

The Great Fall

The interesting thing here is that thanks to a higher excise duty per litre of petrol and diesel, the collection of excise duties has risen, despite fall in consumption. Also, the other interesting bit here is that the consumption decline was at 8.4% in June. The situation has worsened since then.

In the last six years, the government hasn’t passed on the fall in the price of oil to the end consumer. In May 2014, when Narendra Modi took over as prime minister, the average price of  the Indian basket of crude oil during the month was \$106.85 per barrel. The following chart plots the average price of the Indian basket of crude oil during a particular year, over the years.

Oil not on boil

Source: Petroleum Planning and Analysis Cell. (https://www.ppac.gov.in/content/149_1_PricesPetroleum.aspx).  *Between April and August 2020.

The above chart makes for a very interesting reading. The average price of the Indian basket of crude oil in 2020-21 at \$35.74 per barrel, has been the lowest since 2003-04. But that is clearly not reflected in the retail price of petrol and diesel, thanks to higher taxes, particularly higher excise duties.

A May 2020 report by the Press Trust of India points out: “The tax on petrol was Rs 9.48 per litre when the Modi government took office in 2014 and that on diesel was Rs 3.56 a litre.” The Modi government has captured a bulk of the fall in price of oil over the years. This is clearly reflected in the following chart, which plots the excise duty earned by the government from petroleum products.

Up, up and away.

Source: Petroleum Planning and Analysis Cell. (https://www.ppac.gov.in/content/149_1_PricesPetroleum.aspx). *Between April and June 2020.

As can be seen from the above chart, the excise duty earned from petrol and diesel has more than doubled over the years. While, the government has captured a bulk of the fall in oil prices, there are no guarantees that it will protect the consumer, if and when oil prices start to go up again.

Also, this is a very easy way for the government to collect revenue. It allows them to go slow on more difficult ways, like selling stakes in public sector enterprises (PSEs), selling the massive land owned by PSEs, shutting down the badly run PSEs, fixing the badly implemented goods and services tax system, and so on.

Take a look at the following chart which compares India’s petrol and diesel prices with that of our neighbouring countries.

The Indian high

Source: Websites of oil companies in these different countries. Nepal prices from local newspapers.
(I would like to thank Chintan Patel for putting this table together).
Prices as of October 1, 2020.

The above chart clearly shows that the petrol and diesel prices are the highest in India. And as they say, there is no free lunch in economics. You and I are paying this higher price, not just when we buy petrol and diesel directly, but also when we pay for almost every product that is produced somewhere and delivered to where we are.