Inflationary Trends in Indian Petrol, Diesel, LPG Prices: An Analysis

27 July 202127 July 2021 Shreya Devarajan , TheRise.co.in

The prices of petrol, diesel and LPG have caused a major disruption in the mobility of the Indian masses. The constant price hike has triggered an inflationary trend that gradually forces communities to take a leap back from the consumption of energy fuels and makes it obligatory to analyse the inflationary petroleum prices in India.

India has a large population engaged in activities that make it unavoidable to commute on a daily basis. The post-modern period introduced the means to commute using fuel to run automobiles. This created a demand for petroleum products in the country and provided a base for the industries with crude oil refining and petroleum distribution to the community. The majority of the supply of fuels has been from foreign countries.

The last decade witnessed a rise in the price of essential fuels leading to massive causation of disruption and block among the providers and consumers alike. It gained utmost significance as the people from the lower strata who primarily relied on these fuels for cooking and commutation faced a massive setback. This developed inflation in the economy as the demand and the price of the oil increased gradually for two years now.

India is 85% dependent on imports for crude oil supplies in the country. Essentially the price of petrol, diesel and LPG is largely dependent on the charges levied on the crude oil for processing, freight, taxes and the dealers’ commissions. The Indian market has been witnessing a continued price hike in petrol, diesel and LPG supply bringing about disparity and tensions in the economy. The prices of petrol, diesel, and LPG were Rs.101.84, Rs.89.87 and Rs.834.50 respectively in the domestic market the previous week. It is not an absolutely new phenomenon with regards to the price hike but what is relatively new is the continued price rise since January 2020. The month of May 2021 had witnessed a hike in the price of petrol on 40 occasions and in the price of diesel on 37 occasions.

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The Union Minister for Petroleum, Natural Gas and Steel recently stated that the Government cannot bring the fuel prices down because of the huge amount of money being spent on welfare schemes owing to the effects on the COVID-19 Pandemic. This implies that there can be chances of consecutive rises in prices for a longer period of time. It is true that reducing imports would result in excessive demand and subsequent exorbitant petroleum prices in the country.

Factors Responsible for the Price Hike

India follows a dynamic fuel pricing model. There has always been a demand for petrol, diesel, LPG and other by-products as these act as the facilitators of the primary and secondary sectors of the economy. The primary reason for the existing high price of petrol, diesel and LPG appears to be the taxes levied by the central and state Governments. The recent hike in the taxes in the middle of the crisis of the surge of the COVID-19 has worsened it. The four key factors that influence the price are as follows:

Crude oil price, its processing charges, and freight
Excise duty charged by the Government
Dealer commission
Value Added Tax levied by the state Governments

The fluctuations developing within the functioning of these factors tend to cause price variations in the domestic market. Fuel prices differ from state to state as the charges levied by the State Governments differ. Hence, regional variation in the price of petrol is a cause of concern. Since October 2020, there has been a significant drop in the consumption of petrol and diesel but the price hike prevailed. This would in turn lead to cost pressures in the country as observed by the Reserve Bank of India Governor Shakthikanta Das (Nidhi Jacob, 2021).

Source: (India – crude oil price trend 2009-2020 | Statista, 2021)

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The decade has unstable data frequency in connection to the Crude Oil price variation. The fluctuations in the price have been a result of the inflation that had hit the world in 2004 affecting both the International market and Indian market alike (India – crude oil price trend 2009-2020 | Statista, 2021). Despite the crude oil being priced around 25 to 30 rupees, Indian consumers continue to pay 13% higher price in the domestic market for petrol. Even after the International crude oil price fell down in 2020 from the previous year, Indian consumers continued to pay five times higher price than the crude oil price. It is to be understood that the global crude oil prices dictate the market price of the products as well. But refining and supply of petroleum products amount to the reason for increasing the prices at such an amplified level.

During the 21^st session of the Conference of Parties (COP – 21) held in Paris, it had been stated that India would emerge as the greatest contributor to the world energy demand between 2016 and 2040. Post the Paris Agreement, there had been several efforts to reduce the emissions by petrol or diesel led equipment or machinery by replacing it with fuels from the non-conventional sources of energy. Although the policy had been highly appreciated and regarded fundamental, the process lacked strategic intervention and directives to implementation. Ultimately, this reverted back into using petrol, diesel or LPG for various needs in the domestic market.

India follows the dynamic fuel pricing system to determine the cost of petrol as fuel prices are revised daily. This strategy has been adopted to transfer any profit out of the fall in oil prices at the global level directly to the consumer while the Government imposes taxes on the base price.

In the domestic market, the fuel prices are determined by the variants such as demand, supply, taxation and dealer commission following a dynamic fuel pricing process wherein there is little or no control over the pricing. The receipts generated by the Government are told to go towards providing welfare schemes for the underprivileged and vulnerable communities to sail through the ravages of the pandemic. This has led to a close-eyed approach to the prevalent problems in connection to the price hike.

Way Forward

The way forward regarding the excessive price hike in the oil rates is to plan strategically to surpass the pandemic losses by regaining the economy. This can be achieved by providing more employment opportunities to the people. As marked in the National Biofuel Policy of 2018, the dependence on imports must be reduced by effectively channelling the emphasis on energy security. Though the adoption of alternative fuels will take time, smaller steps can be taken at present to route the consumers towards the possibility of a safer option of the use of non-conventional sources of energy.

The immediate step to be taken is to reduce the taxes to increase mobility in the country and thereby relax the tensions by lowering the accumulated inflation in the economy (Jacob 2021). Achieving the appropriate targets without inflationary trends would help in reviving the economy back to a healthy state.

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