Fuel Hike Rate In India Has More To It Than Just Soaring Crude Rates Internationally

 

1. What all constitutes the fuel price cost?

Of the total fuel cost that we pay for a litre of petrol or diesel, more than 50 percent or 2/3rd of the price goes to the centre. Say for instance from the IOC website, price buildup of petrol at Delhi effective June 16, 2021 is as below:

So, as is understood from table, of the total retailing price of petrol i.e. at Rs. 96.66, Rs. 55.21 is the cost towards excise duty and VAT, which is over 50% of the total fuel cost.

For a broader understanding, here is given a break up for petrol prices as sourced from the petroleum ministry.

From the table above we can infer that while the landed cost has a part to play in the overall fuel cost, it is not much impacted with the change in crude rates internationally. Also, the taxes that account for the major cost of the fuel is one reason why fuel prices do not fall in tandem with falling international rates.

Also, importantly other factors that make up the cost of fuel in India include without doubt the raw material cost, crude oil, refining cost, foreign exchange cost as well as the demand in addition to the government levies.

2. Why fuel prices shall continue to rise unabatedly in India at least for 2021?

Like coronavirus, Indians must now also prepare to live with higher fuel price at least for this year. This is because already we are seeing a continuing rise in crude rates internationally which is weighing on Indian fuel rates as well. Also, if not for higher crude rates internationally, strength in the dollar will also increase the cost of oil which is majorly imported into the country. Now other factors, such as rising demand with the unlocking of the states post second wave and higher central and state taxes will continue to impact the overall fuel cost.

Global ratings agency Fitch has made an estimate that the Indian currency rupee will average at 75.5 per US dollar in the ongoing year i.e. 2021. Last rupee traded at 74.377 per US dollar.

3. Rising fuel price and its impact on Indian households.

Inflation is the general increase in price of goods and services and fuel is among the important commodities that one cannot do without. As it is on soaring food prices such as the increasing cost of edible oil and fuel prices, retail inflation measured through CPI index has risen to a six month high of 6.3%.

This rising cost in fuel is viewed to impact the discretionary spending by households as in order to pay for the rising fuel rates they may cut on the former expense.

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