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Why Diesel price is hiked in India & what it means for consumers

With the COVID-19 pandemic hitting the economy and putting it in bad shape, the Government of India has been looking for ways to increase its revenues. In a move that will affect consumers across the country, the Narendra Modi-led government hiked the price of Diesel for a record 18th day in a row. 
 
While there has been no increase in petrol prices, the price of diesel was increased by 48 paise on Wednesday. As a result, diesel was retailing at Rs 79.88/litre, a tad higher than petrol at Rs 79.76/litre in the national capital.
 
However, diesel is costlier than petrol only in the national capital where the state government had raised local sales tax or VAT on the fuel sharply last month. Petrol costs Rs 86.54 a litre in Mumbai and diesel is priced at Rs 78.22. In Chennai, a litre of petrol comes for Rs 83.04 and diesel for Rs 77.17.
 
In Kolkata, petrol is priced at Rs 81.45 per litre and diesel costs Rs 75.06. In Bengaluru, petrol comes for Rs 82.35 a litre and diesel for Rs 75.96. In Hyderabad, petrol is priced at Rs 82.79 a litre and diesel at Rs 78.06.
 
The scenario: 2014 Vs. 2020
 
Traditionally, diesel was priced Rs 18-20 a litre lower than petrol due to lesser taxation. But over the years, the taxes have increased, narrowing the gap. 
 
In June 2014, soon after the Narendra Modi government took charge in its first stint at the Centre, petrol and diesel were retailing at Rs 71.51 a litre and Rs 57.28 a litre respectively in Delhi. There was a price gap of Rs 12 between the two fuels at a time when the price of crude oil stood at $109.1 a barrel. Since then, the government has raised excise duty on the two products on 13 occasions while reducing it only twice. 
 
Deregulation & Daily Revision
 
Meanwhile, in October 2014, diesel prices were deregulated in India, linking them directly to the international market rates. Prior to the deregulation, diesel rates were regulated by the Centre. Deregulation makes the diesel prices market determined without any government intervention. That means any fluctuation in the global crude oil prices will directly affect the retail diesel prices.
 
Three years later, in June 2017, the government introduced the daily revision of diesel prices or the dynamic fuel pricing model, according to which the fuel prices were revised daily based on the previous day's international crude oil price and currency conversion rates. 
 
With this move, India joined the likes of developed nations such as the US and Australia where even the smallest change in international oil prices would be directly passed on to the dealers as well as the customers on a daily basis. 
 
Nevertheless, fuel users in India have hardly benefited from the move even as crude oil prices have been plunging consistently, despite fall in international oil prices. From the highs of $105 per barrel in 2014 to $74 per barrel in 2018, the current prices hover near $40. 
 
On a monthly average, the crude oil price touched as high as $76.73 per barrel in October 2018 to as low as $21.04 in April 2020. Prior to the current rally, the peak diesel rates had touched was on October 16, 2018 when prices had climbed to Rs 75.69 per litre in Delhi. The highest ever petrol price was on October 4, 2018 when rates soared to Rs 84 a litre in Delhi.
 
When rates had peaked in October 2018, the government had cut excise duty on petrol and diesel by Rs 1.50 per litre each. State-owned oil companies were asked to absorb another Rs 1 a litre to help cut retail rates by Rs 2.50 a litre.Oil companies had quickly recouped the Re 1 and the government in July 2019 raised excise duty by Rs 2 a litre.
 
In April this year, the fuel was retailing at Rs 62 per litre as the demand for the fuel was near zero in India due to the COVID-induced lockdown. On Wednesday, when the international oil price is at $42.75 a barrel, diesel is retailing at almost Rs 80 in Delhi. 
 
Modi Govt’s Constant Price Hikes
 
Notwithstanding the consistent fall of crude oil prices, both petrol and diesel have only become dearer for consumers in India, with the government trying to cash in on lower prices by hiking the excise duty of the fuels. A cash-strapped Central government has been consistent in hiking the excise duties on the fuels. 
 
In 2014, the excise duty on per litre of petrol and diesel were Rs 9.48 and Rs 3.56 respectively. This has risen to Rs 32 per litre for petrol and Rs 31.83 for diesel (a hike of around 137 per cent). 
The government on March 14 hiked excise duty on petrol and diesel by Rs 3 per litre each and then again on May 5 by a record Rs 10 per litre in case of petrol and Rs 13 on diesel. 
 
The two hikes gave the government Rs 2 lakh crore in additional tax revenues. A recent report by Care Ratings noted that the Central government now collects around 270 per cent taxes on the base price of petrol and 256 per cent in the case of diesel. 
 
Oil PSUs Indian Oil Corp (IOC), Bharat Petroleum Corp Ltd (BPCL) and Hindustan Petroleum Corp Ltd (HPCL) instead of passing on the excise duty hikes to customers adjusted them against the fall in the retail rates that was warranted because of fall in international oil prices to two decade low. International oil prices have since rebounded and oil firms are now adjusting retail rates in line with them. 
 
A breakdown of your diesel price
 
In the total Rs 79.88 per litre for diesel, the base price component is just Rs 22.93. Over 63 per cent of the retail selling price of diesel is taxes. In addition to the Rs 31.83 central excise, Rs 17.60 is collected in the name of VAT. As a result, the total tax incidence on diesel is Rs 49.43 per litre. 
 
Meanwhile, the falling rupee has also added to the cost of the fuels, according to oil marketing companies. From less than 60-levels of June, 2014, the rupee is currently trading near 76-mark against the dollar. OMCs argue that much of the gains of lower crude oil prices have been offset by the falling rupee that makes oil imports that much more expensive. 

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