India :Why fuel prices are rising to historic highs

 India imports over 80 per cent of its crude oil requirement, so the increase in global prices has a direct impact on fuel prices in India.

 

Fuel consumption rose for the fourth straight month to an 11-month high in December, necessitating higher imports. Oil imports in December were about 29 per cent over the previous month, and about 11.6 per cent higher than a year earlier.

Crude oil prices have also been rising this year despite a global contraction in economic activity. This is because the Oil Producing and Exporting Countries (OPEC) and Russia agreed, in early January, to cut back on oil production to increase prices.

Part of the increase also comes from new duties and cesses levied by the Centre and state governments. As per the price build-up shared by Indian Oil Corporation, on January 16 this year, when the cost of petrol was Rs 84.70 a litre in Delhi, excise duty came to Rs 32.98, while state VAT was Rs 19.55. (These comprised 62 per cent of the cost.) 

By way of an example, just before Modi came to power, petrol was selling at a bit above Rs 75 while crude prices were as high as $110 a barrel; but now local prices are in the high 80s or 90s despite crude prices hovering just above $60.

As economist Ajit Ranade explains, while earlier it was charged more as the sharable central excise tax, now the levy is charged more as cess, which doesn't have to be shared with the states.

It means the Centre gets to keep more and more of the pie, while states are left in a tight corner. For example, the budgeted fuel tax for next year stands at Rs 3.2 lakh crore, of which the states will get just Rs 7,000 crore, a ToI report says.

This sounds counter-intuitive, but there is a clear reason: Tax. Over two-thirds of the price you pay for fuel comprise tax and other levies. As a result, less than a third of the retail petrol price in India is affected by a movement in crude prices.

The centre has changed the way these taxes are shared with the states, meaning that the central government now helps itself to a bigger pie and states find themselves fiscally cornered.