Why India is facing fuel prices hike

New Delhi: Fuel prices are set at an alarmingly high price across the country after a notification by state-owned fuel retailers listed the rise in fuel prices in the national capital on Sunday — with an increase of 17 paise per litre for petrol and 10 paise per litre for diesel.

After the recent hike in fuel prices, the price of petrol and diesel in Delhi were set at 82.61 and 73.97 rupees per litre respectively. The cost of petrol inched closer to Rs 90 a litre mark in Mumbai as it was set at 89.97 rupees per litre for petrol and 78.53 rupees per litre for diesel.

There are a number of factors that affect the fuel prices, particularly considering the fact that they are still under the influence of the erstwhile Sales tax and Value added tax (VAT). So here are 5 reasons behind this exponential rise in fuel prices since August 31.

International factors: For India, a major chunk of its fuel is exported from foreign lands. In this case, a big stakeholder is the Islamic Republic of Iran which accounts for about 11% of the total oil export. Now, as tensions between US and Iran have been escalating for past some time now, US has switched to a method of imposing sanctions on Iranian exports and warned other countries of similar consequences if they further enhance their trade relations with Iran. Under Global Magnistky Act of 2016, the United States imposes sanctions on any potential country that is involved in a trade relation with American adversary like Iran, North Korea, Russia etc. This has greatly affected the Iranian export of oil in India as it is already in the limelight of a number of sanctions from the USA after its final purchase of S-400 defence system from Russia.

OPEC: The organisation for petroleum exporting countries (OPEC) is an international organisation of 15 countries — which accounts for about 44% of the global oil production. This gives them a major influence on the global oil prices and for the past several months now, OPEC nations have been producing less oil to see an increase in their revenue. This has significantly increased the prices of oil as countries like India will now have to pay more for their constant demand of oil, pertaining to a limited supply by the major oil producing nations.

Crude oil prices and US dollar: A limited supply in oil by OPEC has resulted in a sudden rise in global crude oil prices which is currently US$70.78 per barrel. An increased crude oil price alone would not have been that big of an issue for India but the Indian rupee is seeing a major dip against US dollar in this financial year. A US dollar currently amounts to 72.24 Indian rupees, making it one of the worst performing currencies in 2018-19. This means that India has to now pay more in order to buy one barrel of crude oil than last year since the standard currency of global trade is still largely the US dollar.

Domestic taxes: Petrol and diesel are still under the former Sales Tax and Value added tax (VAT) system which has been replaced by Goods and Services Tax (GST) for other commodities. This, in turn, means that the crude oil after entering the Indian territory from foreign lands is subjected to a wide range of taxes — both by the central and state governments. First, there is an additional excise duty and transportation cess charged by the central government on the basic price of crude. Additionally, the state government imposes VAT on it, ranging roughly from 27% in some states to as high as 39% in others. This significantly increases the price of fuel for common people and they have to pay the final amount inclusive of all these taxes. A deduction in VAT or other taxes may atleast for a short period of time, give relief to common people from exponentially high fuel prices. This has been done by some states as a measure to check high fuel prices, but the scale has not been large enough to benefit people on a mass scale.