Retail fuel prices in India hit record high with petrol costing Rs 94.46 per litre in the national capital Delhi and Rs 101 per litre in Mumbai.
It must be noted that the retail price of the fuels have jumped by 4% in the last four weeks.
Some may be holding on to a hope that the surge in the prices is temporary and the fuels will get cheaper in the coming days.
However, the analysis of the factors that contribute in deciding the retail price of the fuel indicates that it is unlikely that the triple-digit price per litre is going to come down at least till the end of 2021.
High fuel prices for an extended period of time hurt almost everyone. The ripple effect of the high prices of petrol and diesel make other things expensive.
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Worried about this consequence, the Reserve Bank of India (RBI) governor, Shaktikanta Das, repeated his official request to reduce taxes and duties on fuels to keep inflation under control. This happened during the bi-monthly monetary policy update on June 4, 2021.
There are three factors which play their role in determining the retail price of the fuels in India:
1. International crude oil prices
2. US Dollar – Indian Rupee foreign exchange rate
3. Indian government’s taxes and duties
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International crude oil prices
The price of the Brent Crude was its highest since May 2019 crossing the $71 per barrel mark.
The average price of Brent Crude is likely to be $62.26 this year, according to the estimates of the US Energy Information Administration (EIA).
This predicted level is about 50% higher than the average price for the last year.
Whereas the World Bank has predicted that the average price per barrel will be $56, and the International Monetary Fund (IMF) predicts the same to be $59.74.
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However, the investment bank Goldman Sachs predicts that the price per barrel will hit $80 within the next six months i.e. till December 2021. After this, the investment bank expects the price to come down.
US Dollar – Indian Rupee foreign exchange rate
India purchases crude oil in USD (US Dollars) and pays in INR (Indian Rupee).
The consequence of this international trade is the inevitable exposure to currency risk. In other words, a stronger dollar with respect to Rupee means that India will have to pay more for the same quality and quantity of crude oil.
Now, the global ratings firm Fitch predicts that the Indian Rupee will average Rupees 75.5 to a dollar in 2021, which is higher than the price last year at Rs 74.13.
Indian government’s taxes and duties
It is no secret that the retail sale of fuels is a perennial cash cow for both the central and the state governments of India. About 60% of the cost paid by you and I to refuel our scooters, bikes, and cars goes to the governments as taxes.
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It must be observed that petrol and diesel are the two highest prices commodities in India, and the governments skilfully kept them out of the ambit Goods and Services Tax (GST).
Further, in the six years of the Modi administration, tax collection of the two fuels jumped over 300%.
A national news agency was informed by the Finance Minister Nirmala Sitharaman that the GST Council may consider moving the two fuels under the purview of GST.
Noble and rational as the thought may be, if the recommendation is sincere, then implementing it would be a tall order because to not reduce the incoming of cash would require a GST rate above 100%.
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Currently the GST slabs are 5%, 12%, 18%, and 28%.
Thus, in light of the three factors that decide the retail price of petrol and diesel, every Indian is recommended to drop the idea that the prices of the fuel are coming down at least till the end of this year.