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Sudden rise of petrol and diesel price


Crude oil has been one of the most important commodity for India. We are heavily dependent upon the oil exporting nations for our oil. India imports about 85% of its oil and therefore oil import has been costing the import bill and impacting the Current Account Deficit (CAD). The prices of petrol and diesel have been soaring in India, with petrol costing above 80 rupees a litre whereas diesel costing approximately 70 rupees a litre in the past few months. The prices of crude oil depend upon the global market conditions and therefore it becomes necessary to assess these conditions in order to study their impact on India.

Iran has always been a good friend to India. The bilateral ties between these two countries have strengthened over the years. Also, Iran was one of the major exporters to India. India enjoyed subsidies on oil import from Iran. Therefore, the oil prices in India were under control with petrol prices varying between 72 - 80 rupees a litre. But, with the Donald Trump Administration in the U.S, the picture changed drastically. First, the U.S. walked out from the nuclear deal pact which was signed between Iran and P 5+1 nations. Second, under the CATSA (Countering America's Adversaries Through Sanctions Act). U.S. imposed sanction on Iran. These sanctions not only costed Iran, but they also had a transitional effect on India. The import of oil from Iran was banned. This forced India to look upon to other oil exporting nations for oil without the benefits of any subsidy.

The depreciation of rupee against dollar is another reason for the sudden increase in the prices of petrol and diesel. The rupee has been at constant downfall, especially in the second quarter of the financial year 2018 - 19. The on-going trade war between the U.S. and the world has had an adverse impact on the world economy, especially the economies of the developing countries like Argentina, Turkey and India. To add to this, the economic policies implemented by the U.S. has resulted in the pulling back of investments from the developing countries by the foreign investors. For instance, the Foreign Portfolio Investments pulled out from India in the first quarter of financial year 2018-19 were Rs. 48,000 crores. Such disinvestments from the country lead to the rupee crumbling against dollar. This in turn costed India more dollars per barrel of oil imported, leading to the increase in prices.

Oil and petroleum have been kept out of the ambit of GST. This leads to the Center and State levying different taxes at different stages. First the Center levies Central Excise Duty and then the state levies Value Added Tax (VAT) on the same commodity. Moreover, the percentage of tax levied varies from state to state. Though this is not the reason for sudden increase in the prices, it has had an impact on the prices of petrol and diesel when the global rates for crude oil were comparatively less. At the present scenario, the overall high rates of crude oil globally plus the dual tax structure has had a cumulative impact on the price of petrol and diesel.

Although the reason for the sudden increase in the prices of crude oil i.e. petrol and diesel are due to the global circumstances, India should take measures in order stand robust against these global forces. First investment should be done on research and development on finding potential reserves of fossil fuels. This would low down our imports and effectively bring down the CAD. Second, the National Policy on Biofuels must be implemented in letter and spirit. This would help in lowering the impact of pollution on environment. Third, an initiative must be taken to bring oil and petroleum in the ambit of GST. This would help in curbing the prices of the fuels. Self-sufficiency in oil could do the same miracle that Green Revolution did in the late 1960's.

- Aakash Kadam