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Pricing
in India
How petroleum prices are regulated in India depends upon
an understanding of how the oil industry works. End-users
often correlate crude oil price vis--vis price of petrol and
wonder at the discrepancies ignoring the intermediate
Photo: Prasad
converted to a finished product for the end-user. 1 per cent to 2 per Refinery gases
2 per cent to 4 per LPG
From the cost break-down, it is clear that the
5 per cent to 10 per Jet fuel
refinery processing fees are meagre. /Kerosene
5 per cent to 18 per cent
other products
Price subsidies in India
Fossil fuel subsidies were 5 trillion USD in 2015
according to the International Monetary Fund. 12 per cent to 24 per cent Diesel
fuel and heating oil
Unfortunately, the worlds largest energy subsi-
disers are also the largest energy consumers, led
by China and the United States, which together
accounted for a 3 trillion USD subsidy in 2015,
20 per cent to 45 per cent Gasoline
followed by India, the European Union, Russia and
Japan.
The Indian government historically subsidised
petroleum prices from 1947 till June 2010 with the Yield of various petroleum products depends upon the sources of
objective of protecting consumers from interna- crude oil. Gasoline yields range from 20 to 45 per cent when the
tional price volatility and providing energy access crude oil is of light variety.
for its citizens, especially the poor. However, energy
subsidies placed a heavy burden on government Fig. 2A: Crude oil prices : 1950-2016
budgets, while often failing to reach their targeted $ 160 Recession periods
by general public, only LPG and kerosene are Inflation and prices of crude oil are interconnected and fluctuate in
controlled and subsidised by the government. All agreement with each other.
Source: Data by Macrotrends.net
other petroleum products prices are linked to
crude oil pricing in the international markets. From
Fig. 2B: Gold price to crude oil price
June 16, 2017, the government allowed gasoline and
Recession periods
diesel prices to fluctuate daily instead of the earlier 45
practice of once every fortnight across the country 40
(Hindustan Times, June 16, 2017). This has been
35
done to enable oil companies to align domestic rates
30
more closely with global pricing. The daily changes
would eliminate irregularities arising from the
Ratio
25
daily revision should prove as win-win situation Over the years, the ratio between barrels of oil one could buy
for producers and consumers both. Incidentally, with one ounce of gold has not changed much.
the daily adjustment model is followed in several Source: Data by Macrotrends.net
3,200 160
One can witness a progressively increasing
2,800 import of crude oil over the period to meet the 140
Crude oil - Thousands barrels /day
2,000 100
1,600 80
1,200 60
800 40
400 20
0 0
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Crude oil
Prices Ocean
(Indian basket) freights and
INR 19.46/litre on June 7, 2017. transport charges
Price to
consumers
INR 63.55/litre on
June 26, 2017
at New Delhi
Plus
dealers
commission INR
2.58/litre
certainly not pro-poor. For example, in India the leum products under the GST regime. However, it
real poor have no or very little access to mechani- is not expected to bring any radical change to the
sation of any kind. Therefore, the cheap fuel does final selling price of petrol at petrol-pump outlets.
not benefit them. It all ends up being a subsidy Overall pricing will continue to be governed by the
to the middle and upper classes and they are rich criteria discussed earlier.
enough to be part of an unsubsidised mechanised The government may collect the GST as a specific
economy. percentage of the base price and distribute the
The average retail sale price of gasoline around tax proceeds internally to the parties at stake. For
the world is approximately 1.02 USD/litre. The example, the cost components of stage 1, 2, 3 and
Indian retail price is equivalent to 1.05 USD/litre 4 may be clubbed as the base price, whereas tax/
as on July 10, 2017 (globalpetrolprices.com). It can overhead components at stage 5, 6 and 7 may be
thus be seen that Indian pricing is fairly close to clubbed as GST (Fig. 4).
international pricing. There could be other ways of calculations.
It may, however, be concluded that the overall
GST imposition pricing to the consumer will not alter and stay
As of July 1, 2017, the Indian government replaced at par with the prevailing international pricing.
various levels of taxation and duties to a single As discussed earlier, the government may absorb
entity, i.e. Goods and Services Tax popularly part of a steep hike if crude oil prices shoot
known as GST. The idea is to bring price uniformity abnormally high, say above 100 USD/barrel.
and simplify tax collection across India. The Likewise, the government may keep part of the
petroleum products are out of this regime at the windfall if the crude prices crash further. It
moment and continue with the existing pricing would be of interest to watch the tax mechanism
structure. if the government decides to keep the GST, as it
Eventually, the government may bring petro- is, under such differing scenarios.
There are several stages at which fees, freight rates and taxes are added
eventually deciding the petrol prices that the consumers pay.
Central
State excise
specific plus custom duty
value added tax added.
INR 14.28/litre INR 22.70/litre plus
3 per cent education
cess
Source: Data from: Petroleum Planning & Analysis Cell, Govt. of India, Graphic by: Author