India is the world's fastest-growing economy and the fourth-largest auto market by sales volume. Given this, it's not surprising that the country consumed over 250 million tonnes of petroleum, the third highest in the world, in 2018. But, India is also ranked fifth in oil refining capacity and its petroleum exports are only next to the US, Russia, the Netherlands, and Singapore. Considering this dynamic, one may wonder if petrol shouldn't be cheaper than it is in India, which is a net exporter of oil with vast refining capabilities; in fact, retail petrol price in the country is almost double its export price. In this article, we explore different dynamics that influence petrol prices in India and various means of saving on this expenditure.
How Are Petrol Prices Set in India?
Previously, oil prices in India used to be set every fortnight by petroleum companies based on the average international crude prices. However, the government adopted a dynamic fuel pricing method on June 16, 2017, allowing oil companies to fix petrol prices daily. Effectively, what this did was to help oil companies protect their profit margins by passing any change in prices to consumers. If crude prices or the currency exchange rate moved unfavourably, companies can react the next morning to offset the impact.
Why Are Petrol Prices in India Going Up?
As of August 20, 2019, the average cost of one litre of petrol in Delhi stood at ₹71.84, up 4.64% from ₹68.65 on January 1. The recent rise in petrol prices in India is attributed to three factors. First, the government frequently increases taxes on petrol to raise its revenue. In India, the federal and state governments often resort to hiking taxes on petrol whenever they need funds for development projects. For example, the latest federal budget presented on July 5 2019 increased the excise duty on petrol by ₹2 to finance road and infrastructure building. In fact the central excise duty went up 12 times in the past 5 years. States also impose their own value-added tax (VAT), sales tax, cess, additional tax and surcharge on petrol to boost their revenue collection, which further adds to the price.
Taxes on Petrol in India as of August 20, 2019. (Figure 2)
Crude price (as on August 19, 2019)
Per liter crude oil cost (1 barrel = 159 ltr)
Additional cost: Entry tax, refinery cost, profit margin of oil companies, logistics
The basic price of 1 ltr petrol (2+3)
Central taxes: Excise, additional cess, etc.
State taxes: VAT, added state sales tax, cess, additional tax, surcharge, etc. (27% VAT + pollution cess in Delhi)
Dealer commission to petrol pumps per litre
Retail petrol price (ex-Delhi, on July 6, 2019) (4+5+6+7)
Secondly, because India's oil import dependency is quite high at 84%, its domestic market is vulnerable to any global upheavals involving oil-producing countries. As Iran, which used to supply 20% of India’s import needs at a cheaper rate, came under US sanctions, India now has to source oil from the US and other countries that don’t offer free insurance, transportation, and other facilities provided by Iran. Lastly, the depreciation of Rupee is also hiking import costs, ultimately passing on higher crude oil prices to consumers in India.
Furthermore, the introduction of BS-VI-compliant petrol may push prices up, as oil companies are looking to recover ₹30,000 crores invested to upgrade refineries and produce the cleaner fuel. Though the Auto Fuel Vision and Policy 2025 document suggested a modest hike of ₹0.75, petrol prices may increase by up to ₹2.
Why Do Petrol Prices in India Vary From One Place to Another?
Petrol prices vary heavily in India from state to state and even place to place within a state. For example, the average cost of one litre of petrol in Delhi stood at ₹71.84 on August 20, 2019. In contrast, consumers paid ₹77.50 in Mumbai, ₹74.54 in Kolkata, and ₹74.63 in Chennai on that day. The highest per litre cost was reported ₹79.29 in Parbhani, Maharashtra, while the lowest was ₹62.28 in Port Blair.
This variation in prices is primarily due to differences in taxes imposed by state and local governments. States collect VAT varying from 27% in Delhi to 39% in Mumbai. Apart from this, there are also different local body tax, sale tax, municipal tax, entry tax, cess, and surcharge within a state contributing to the variation in petrol retail prices in different places. For example, petrol is subject to 20% extra cess over VAT in Bihar while this is 30% in West Bengal. In Mumbai, a litre of petrol attracts an additional cess of ₹7.12 compared to only ₹0.50 pollution cess in Delhi.
How Does India's Petrol Price Compare to Those of Other Countries?
Though fuel cost in India may seem high, it's actually lower compared to China, Japan and South Korea, according to Global Petrol Prices. However, it is costlier compared to its neighbours Sri Lanka, Bangladesh, Nepal, and Bhutan, which actually import petrol from India. For example, India exported petrol to 15 countries at prices ranging from ₹32 to ₹34 while consumers at home paid about from ₹69 to ₹76 between January and June 2018. As we mentioned before, this big difference can be explained by the fact that petrol is the highest taxed commodity in India with domestic taxes amounting to 104% of the basic price. Petrol and diesel are the only commodities not covered under the Good and Services Tax that specifies the highest tax ceiling of 24%.
How to Save on the Petrol Bill without Driving Less?
There are 4 ways you can reduce your petrol bills in India. First, you can improve the fuel efficiency of your car by minimizing AC use at low speed, keeping the engine in good condition, maintaining the recommended tyre pressure and cutting on the cargo you carry in your car. For instance, studies have shown that every 50kg in your car can increase your petrol usage by 2%.
Secondly, changes to your driving habit also help reduce fuel consumption. It is important to avoid sudden acceleration, speeding, driving at lower gears, skirting engine warm-ups and abrupt braking, as these cause the engine to consume more fuel. In cities and towns, you should set out early for office to evade traffic snarls on busy roads on peak hours and switch off the engine at red lights. In fact, better driving habits can reduce your fuel consumption by up to 20%! You can get 40% more mileage by driving at 45 to 55 kmph and thus, reduce fuel consumption of your car.
Thirdly, use credit cards to pay at petrol pumps instead of cash. Most Indian banks have tied up with oil companies to offer discounts and cash backs at their pumps ranging from 1% to 5% when you pay using their cards.
Finally, if you haven't purchased a car yet, going for a dual-fuel car that runs on both CNG and petrol can be a good economical choice. CNG enables significant saving on your fuel bill because it costs less than half of petrol and increases the mileage by 30%. On the other hand, automatic cars can guzzle 10% to 15% more petrol than manual ones.
The article What You Should Know About High Petrol Prices in India originally appeared on ValueChampion’s blog.
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