Fuel prices in India – Demystified!

In Opinion on May 17, 2011 by shsmani Tagged: , , , , , , , , , , , , , ,

Petrol costs more than what Aviation fuel costs, thereby putting it right up there in the most valuable commodities. If this keeps going up like this, the so called “Middle Class” families will soon be families below the poverty line. Agreed that the price of oil is rising at the international market, however still why is this disparity between the prices of Petrol and Diesel and more so between and India and other non Oil producing nations?

Reports suggests that the actual cost of importing, refining and distributing petrol works out to approx Rs.36 per litre. If that is the case where is the remaining cost coming from. Are they profits? no… they are excise duties and levies imposed by the government. These work out to about Rs.30 per litre of petrol. In contrast, while Diesel costs a little higher in the international market, it is sold cheaper in India, courtesy lesser levies and


taxes. It is suggested that the levies on Diesel is about Rs.10-Rs.15 per litre.

Why Diesel is getting this Partiality? Some people say it is because of the fact that Diesel is used in farm lands and that is a vote garnering measure. Also, that Petrol is the rich people’s fuel. While all of this was true in the 80’s and 90’s things have changed dramatically at the turn of the millennium. Diesel guzzling SUV’s are the rich men’s favourites and two wheelers and compact cars running petrol is the Middle class families friend. Even official data supports this fact by reporting that Diesel consumed in the country is 5 times more than Petrol. So a simple Rs.2 increase in diesel in enough to negate a Rs.10 decrease in Petrol. It is time the policy makers get realistic and give petrol its due.

Another funny thing the government does with fuel prices is that, it levies a custom duty on crude oil and then subsidizes the prices of refined products like LPG, diesel and kerosene. Why levy a custom duty in the first from the oil companies and then follow it with a subsidy? It only leads to financial pressure on the oil companies who have to first pay the duty and wait for the subsidy. Collecting money from the government is monumental task, and for the period in-between unwanted interest rates are paid, there by affecting the bottom lines of the already sunk oil companies. After all, oil companies are not privately held, so who is actually losing the money? I think the answer is very clear to every taxpayer in the country.

So what can the government do? The simplest of free crude oil imports from duties and the retail sales of petrol and diesel from all forms of taxes and levies. After all, who is the government fooling by adding a custom duty to show income to the government and then giving out a subsidy and billing it as an expense.

Or Alternatively, they could sell ads for every liter of petrol so that at the petrol pump, so that we get to see ads like “this liter of petrol brought to you by blah blah blah” – zoo zoo can show its super power by offering free petrol in its super weeks..and Abhishek Bachchan can suggest using aviation fuel instead of regular gasoline and claim ‘what an idea sir ji’!!!

Do share your thoughts in the comments below.


6 Responses to “Fuel prices in India – Demystified!”

  1. Before I share my views on this, I just want to make a slight correction in the first line of this article. “Petrol costs more than Gas” must be used instead of “petrol costs more than gas prices”. Hope you consider this constructive.

    • All comments welcome… 😀 and I think yours is a valid point, updating my post 🙂

      And btw, I just realized I was looking to compare Petrol and Aviation fuel. So will update that as well.


  2. My 2 cents. The price of fuel at any retail gas station comprises the product costs, central government excise and taxes, State government taxes and above all there are operating costs and margin.

    1. The price of fuel in different countries is generally affected by:

    a. Cost of buying finished product in the country (country supplies usually cheaper than importing product)
    b. Government excise and tax rates
    c. Government subsidies for fuel
    d. Currency fluctuations

    2. The low prices are subsidised by the present through the issuance of oil bonds, which are given exclusively to public sector fuel retailers in India.

  3. Diesel is subsidized because, its the most widely used type of fuel in public services. All government transportation,like buses,trains run on diesel, 90% of the trucks which carry essential supplies run on diesel. Increase in diesel prices will have spiraling effect on the economy. Just by increasing diesel prices alone, will increase the price of most of the items in the basket of goods which is used for calculating consumer price index. Inflation goes up, Interest rates go up, liquidity decreases, economic growth decreases. its a chain process. Even increase in petrol prices increases the inflation, however the effect due to petrol is much less than that of diesel. Even i used be mad at the government for increasing the petrol prices, however , i realized that, its high time people assess their dependence on black gold. I feel one should pay for what they use. The best thing would be to de-regularize the oil industry, so that government does not fix the price of fuel and play the vote bank politics. The prices should be market driven.

    • Well said Divakar, however why tax the commodity so heavily in the first place. The base price of both petrol and Diesel is more or less equal. Duties are to be levied for something that if imported, would dent the domestic manufacturers. In the case of crude oil, we don’t have internal supplies. Need of the hour is to reduce or remove the duties levied on oil and remove subsidies so that the global prices dictates the prices in India as well.

      • good one…have always wondered what’s the logic..and contiue to wonder…i am not an expert on this and have not thought through deeply..but some questions..

        1) if govt is collecting enough in terms of taxes,duty etc…what explains our noticeable fiscal deificit (~5% of GDP)

        2) tend to agree that customs duty on crude does not make sense…but could it be a lever against fluctuating currency which is affected by many other things..if not, whats the logic? since most of it is imported for lack of local source, protection of local firms cannnot be the reason

        3) on the higher excise duty and taxes but giving subsidies at the same time- could it be a means of protecting local firms – that is – all firms pay taxes and duty but only Indian PSUs get the subsidies…also does this explain the price difference at a Shell petrol pump versus others?

        4) assuming the current govt wants to be in power forever(any doubts?)…why would they contribute to the price hike by increasing taxes and duty…

        Whats the way out? No easy answers…
        – Learn to cycle to work..or better walk down:)
        – Have you heard about Car-pooling 🙂
        – Get a job with SAP (they will part of your EMI for buying Reva?)

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