Retail fuel prices in India hit record high with petrolcosting Rs 94.46 per litre in the national capital Delhi and Rs 101 per litrein Mumbai.
It must be noted that the retail price of the fuels havejumped by 4% in the last four weeks.
Some may be holding on to a hope that the surge in theprices is temporary and the fuels will get cheaper in the coming days.
However, the analysis of the factors that contribute indeciding the retail price of the fuel indicates that it is unlikely that thetriple-digit price per litre is going to come down at least till the end of2021.
High fuel prices for an extended period of time hurt almosteveryone. The ripple effect of the high prices of petrol and diesel make otherthings expensive.
Worried about this consequence, the Reserve Bank of India(RBI) governor, Shaktikanta Das, repeated his official request to reduce taxesand duties on fuels to keep inflation under control. This happened during thebi-monthly monetary policy update on June 4, 2021.
There are three factors which play their role in determiningthe 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
International crude oil prices
The price of the Brent Crude was its highest since May 2019crossing the $71 per barrel mark.
The average price of Brent Crude is likely to be $62.26 thisyear, according to the estimates of the US Energy Information Administration(EIA).
This predicted level is about 50% higher than the averageprice for the last year.
Whereas the World Bank has predicted that the average priceper barrel will be $56, and the International Monetary Fund (IMF) predicts thesame to be $59.74.
However, the investment bank Goldman Sachs predicts that theprice per barrel will hit $80 within the next six months i.e. till December2021. 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 inINR (Indian Rupee).
The consequence of this international trade is theinevitable exposure to currency risk. In other words, a stronger dollar withrespect to Rupee means that India will have to pay more for the same qualityand quantity of crude oil.
Now, the global ratings firm Fitch predicts that the IndianRupee will average Rupees 75.5 to a dollar in 2021, which is higher than theprice last year at Rs 74.13.
Indian government’s taxes and duties
It is no secret that the retail sale of fuels is a perennialcash cow for both the central and the state governments of India. About 60% ofthe cost paid by you and I to refuel our scooters, bikes, and cars goes to thegovernments as taxes.
It must be observed that petrol and diesel are the twohighest prices commodities in India, and the governments skilfully kept themout of the ambit Goods and Services Tax (GST).
Further, in the six years of the Modi administration, taxcollection of the two fuels jumped over 300%.
A national news agency was informed by the Finance MinisterNirmala Sitharaman that the GST Council may consider moving the two fuels underthe purview of GST.
Noble and rational as the thought may be, if therecommendation is sincere, then implementing it would be a tall order becauseto not reduce the incoming of cash would require a GST rate above 100%.
Currently the GST slabs are 5%, 12%, 18%, and 28%.
Thus, in light of the three factors that decide the retailprice of petrol and diesel, every Indian is recommended to drop the idea that theprices of the fuel are coming down at least till the end of this year.