Drastically rising gas prices has been at the forefront of the economy since the last two years when there was a spurt in global demand after the lockdowns and since the beginning of the Ukraine-Russia war. Since May 2021, gas prices (including petrol for cars and LPG cylinders) have been on the rise, affecting all aspects of GDP growth (in the form of increased spending) – household consumption, investment, government spending and foreign trade. Recently, gas prices increased to a historic high as gas prices internationally increased around seven-fold. In fact, the price of petrol has touched more than Rs 100 per litre in New Delhi, the country’s capital. This rise in prices has affected the common citizens’ purchasing power resulting in reduced affordability of necessary products and affecting transportation decisions in their daily lives. It has had a severe impact on macroeconomic variables like inflation and raised questions on the political stunts of the current ruling party.
There are a few key factors leading to a rise in gas prices – crude oil (main ingredient of petrol) prices abroad further influenced by the pandemic and the Ukraine-Russia war; the exchange rate between US dollars and the Indian Rupee; refining costs; taxes and excise duties (levying higher taxes to fund major industrial projects). Apart from this, the government also influences petrol prices, using it as a political tool during elections. These high prices are expected to remain for at least the next six months or more, if the Ukraine-Russia conflict increases (even though India claims it is getting cheaper oil from Russia). There’s another confusion on who actually controls these prices (the scheme for which has changed from daily to monthly) – whether it is the government or the Oil Marketing Companies (OMCs).
Keeping these points in mind, I would like to explore two main questions in this paper – 1) Why have gas prices constantly been on the rise? 2) Who makes the major pricing decisions and what are some of the macroeconomic and political consequences of the increase?
The structure of the paper would be as follows – defining the current situation of gas prices in India, briefly looking at the role of the OMCs and the government in making these decisions, elaborate on the key factors of why they have been increasing, the major macroeconomic and political consequences of the increase and finally, looking at the possibility of a decrease in prices in the near future.
Thus, by answering the two main questions, the research would establish the current scenario in the country, its possible future outlook and how economic and political decisions weigh in, in such cases. Although I agree with the arguments made by scholars about factors of the price rise in gas, the situation is a little more complex. It would be an insight into the transparency of the government and the benefits and disadvantages of such policies on the economy, people and eventually, GDP growth as a whole.
Current Situation of Gas Prices in India
The average peak retail price of gasoline in India in April 2022 was Rs 104.15 per litre, which has decreased to around Rs 96.72 per litre in March, 2023. Before the pandemic, gas prices averaged around Rs 60-70 per litre, but since 2021, it touched Rs 90-100 per litre and since then, there has been a rising trend of very high gas prices in the country. Before the pandemic, owners of two-wheelers would normally pay around Rs 900 for an entire tank of fuel, but now, that cost has increased to Rs 1500. Diesel sales are at their highest level ever in some regions of India, where petrol prices are at a 19-month high. Liquefied petroleum gas, which is used in cooking and as an engine fuel, has seen two price increases in the past two months. Notwithstanding the fact that global crude oil prices have fallen from their peaks, these rate increases continue. Currently, India is a country with the most expensive cooking gas and the second biggest consumer of LPG (Liquified Petroleum Gas).
Since 2004, the consumers of sensitive petroleum products, such as petrol, diesel, PDS kerosene and domestic LPG, have been protected from the effects of historically high international oil prices by the Public Sector Oil Marketing Companies (OMCs), specifically IOCL (Indian Oil Corporation Ltd), HPCL (Hindustan Petroleum Corporation Ltd) and BPCL (Bharat Petroleum Corporation Ltd). The benchmark for worldwide LPG prices, the Saudi Contract Price (CP), serves as the basis for LPG pricing in the nation. To protect the average person from an increase in international costs, the government keeps adjusting the effective price to the customer for domestic LPG.
Even though OMCs are to determine fuel prices, in recent years there has been a trend where fuel costs are held constant for weeks prior to assembly elections but are quickly altered afterwards, hinting towards the government’s increasing pressure on the determination of fuel prices and leading the OMCs to go into heavy losses.
This accounts for around 60% of the taxes included in the retail cost of fuel. In addition to taxes, the central government controls gasoline prices through base prices and caps that are set by the PPAC (Petroleum Planning and Analysis Cell) under the Ministry of Petroleum and Natural Gas.
Key Factors of Rising Gas Prices
The first major factor in determining gas prices in India include international oil prices. The price of crude oil is affected by worldly demand and supply, the ongoing Ukraine-Russia war and factors like the pandemic. Its cost makes up for 54% of the retail price of gasoline, which leads gas prices to increase by a significant amount when crude oil prices increase. In the past seven years, oil prices have reached an all-time high, trading over $88 per barrel globally. In December 2021 and January 2022, the high price increased by about 28%. Even before the pandemic, there was an increasing demand for oil but an inadequate supply. According to the International Energy Agency (IEA), there is still a daily deficit of close to 1 million barrels around the world.
The second major factor is the US dollar-INR exchange rate. A direct factor is how strong the USD is in relation to the INR. A weaker rupee is increasing the import costs of oil into India, leading to higher gasoline prices. India imports crude oil from foreign nations, of which the three mainly, are – Saudi Arabia, Iran and Iraq (the largest oil exporter to India). Hence, the rupee’s depreciation (from 82 to 83.29) raises the cost of import. Since India imports about 80% of its oil needs, it is widely believed that higher oil costs will cause the local rupee to decline.
The third factor is refining costs. The crude oil coming into the country has to be processed before it can be sold in the retail market as petrol, LPG etc. Refining costs depend on the cost of energy, raw materials and labour. Since there are few refineries in India, the total amount of gasoline or diesel that will be for sale will likewise be less. Moreover, less supply would result in a higher price for the gasoline due to the increased cost of production. Due to the recent tightening of LNG (Liquefied Natural Gas) prices worldwide, the cost of refining fuel has increased. The supply shortage occurs at a time when the US has suggested capping the price of gas imported from Russia.
The fourth major factor is taxes and excise duties levied by the government. More than half of the retail price of gasoline is made up of taxes and duties. The government increases taxes to fulfil its fiscal targets. Fuel taxes are collected by the Indian government in order to raise money to fund a variety of public services and infrastructural projects. Infrastructure development has been given significant attention by the present Modi administration and has made hundreds of billions of dollars in investments to ultimately provide India with much-needed modern infrastructure. For example, the Pradhan Mantri Gram Sadak Yojana and the Sagarmala Project require billions of dollars of investment. The Indian government has also experienced mounting budgetary deficits in recent years, which have put strain on public resources. While the government might rely on this source of income to meet its financial responsibilities, the COVID19 pandemic has also made it challenging to lower fuel taxes. The Indian government will ultimately need to assess these factors and decide what course of action is best for the nation and its people. The excise tax on gasoline and diesel is imposed by the central government. The central excise charge is a fixed dollar sum rather than a percentage. As a result, the duty does not change in line with the cost of fuel. Now, a litre of diesel costs Rs.31.83 and a litre of gasoline costs Rs.32.98 in duty. No matter how much crude oil prices rise or fall, this sum remains constant. The respective state governments impose the sales or VAT tax. The excise duty levied by the centre, the commission of the dealers and other factors are considered when calculating the retail selling price.
Adding more to the important factors; the Indian government eliminated LPG subsidies for low-income households in its budget for the April 2023–March 2024 fiscal year, despite market predictions of a prolongation due to state and general elections in 2023–2024. Fuel subsidies in India are regressive – both financially expensive and socially backward. The analysis discovered that the richest 20% of households profit from gasoline subsidies six times more than the bottom 20%, on average across a broad variety of low- and middle-income nations; as households with higher incomes consume more fuel than those with lower incomes, notably gasoline. The least regressive product to subsidise is kerosene, which poorer households are more likely to use.
Consequences of Rising Prices on the Economy
Due to these increasing gas prices, there are some major macroeconomic consequences involved. For instance, India’s rising import bill leads the Current Account Deficit to widen. The rising cost of production due to the high oil prices, would lead to an increase in the price of several goods (oil being a crucial raw material in many sectors), causing higher WPI (Wholesale Price Index) and CPI (Consumer Price Index)-based inflation. The value of the rupee is predicted to decline by roughly 0.9% for every 1.2% average increase in oil prices. In order to pay its bills, a country with a large deficit must sell rupees and purchase dollars. It depreciates the rupee, and a declining currency is never advantageous for the economy. The RBI will need to raise interest rates in order to contain inflation as a result of rising crude oil prices. It will result in less expenditure, which will slow down the nation’s growth. The transportation and food sectors have also been majorly affected wherein, transporters are forced to raise rates even in a weak market to cover their costs.
Certain political consequences are involved too. Central and state governments have heavily taxed diesel and gasoline prices, with central taxes being double of state taxes. They have claimed that the tax revenue is going towards “healthcare, creating jobs and giving people financial security”. The difference between the price of international crude and the retail pricing of fuel in India had reached an all-time high in March 2020 and is still substantially greater than it was before the outbreak.
Despite importing cheap oil from Russia, India has high fuel prices due to hefty taxes, global crude prices, refining expenses, exchange rates, distribution and transportation costs. Moreover, the high cost of gasoline is not just a problem in India. The rising cost of gas is an issue in countries like America, Europe and China. Even if the tax were totally eliminated at this moment, petrol costs would still be high compared to India in 2020.
The government faces a challenge as a result of the rise in oil prices since it affects people’s disposable earnings in a country where private spending makes up around 60% of GDP. Higher oil prices translate to faster inflation for the central bank, which can put its commitment to maintain lower borrowing costs for longer to help the economy’s long-term recovery from the pandemic to the test.
Several factors contribute to the rise of gas, which further affects the economy and poses many problems to the consumers, producers and GDP growth in general. Tackling inflation in the economy gets very hard when the government is refusing to cut fuel taxes and the citizens have to suffer with the high cost of living. Being dependent on global prices and phenomena, it is out of the economy’s control to ascertain low prices. To conclude, even though these prevailing factors do affect the rise in gas prices, it has been exacerbated by the pandemic and the government has benefitted from the situation with higher taxes. Gas affects various crucial sectors of the economy and thus, living without it is not an option. Simply put, expecting gasoline prices to drop significantly in the foreseeable future is unreasonable. But, there is some good news: India has been investigating domestic oil production, and there are oilfields in the states of Assam and Gujarat as well as offshore in the Bay of Bengal. The government has also suggested an implementation of a blend of 20% ethanol in petrol to decrease the import of oil. This could be a positive first step in reducing our reliance on foreign oil, which would make India less susceptible to the dramatic price swings we are currently witnessing. What is certain is that as the Russia-Ukraine situation cools off, as the world economy and international crude prices stabilise and as the COVID-19 pandemic comes to an end, the oil market will become less volatile and interruptions as well as the cost of gasoline will decline.
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