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How petrol, diesel prices are fixed and why they change every day

One of the most important factors is the tax levied by the state and central governments. As of now, fuel has been kept outside the purview of Goods and Services Tax (GST).

twitter-logoBusinessToday.In | September 4, 2018 | Updated 15:46 IST
How petrol, diesel prices are fixed and why they change every day

Fuel prices in the country are again at an all-time high today. A litre of petrol in Mumbai will cost the buyer Rs 86.72, while it is Rs 79.31 in Delhi, Rs 82.22 in Kolkata and Rs 82.41 in Chennai. Diesel, on the other hand, is being sold at Rs 71.34 in Delhi, Rs 74.19 in Kolkata, Rs 75.74 in Mumbai and Rs 75.39 in Chennai.

However, what determines petrol and diesel prices and why does it change every day?

The prices of petrol and diesel are determined by various factors. First the cost of crude oil, second the taxes the Centre and states impose. There's also dealer's commission and VAT that gets added before it's sold to the consumer. Petrol and diesel are expensive, primarily, because of the central and state taxes, otherwise it would be much cheaper. Taxes on fuels is a huge revenue generator for the government, and it's a tough decision for the governments - Centre and states - to cut it to reduce fuel prices.

As for the everyday change in fuel prices, it's because of a dynamic pricing system that reflects fluctuations in global oil market. Earlier petrol prices were revised every fortnight, meaning that unlike now, the prices changed on the 1st and 16th of every month. However, on June 16, 2017, a new scheme was implemented under which prices were to be revised every morning at 6 am. This shift from administrative price mechanism (APM) to dynamic pricing was done to ensure that the benefit of the smallest change in international oil prices can be put into effect by dealers. Moreover, the move was made keeping in mind that it would prevent huge leaps in prices at the end of the fortnight.

One of the crucial differences between APM and dynamic pricing is price decontrol. Before dynamic pricing was implemented, private companies protested government-controlled pricing saying that it reduced their profitability. It also impacted competition, leaving consumers with little choice. On the other hand, market pricing not only allowed competition, it was also supposed to benefit the consumers and bring parity with international product prices. It was also believed that dynamic pricing would keep speculative market forces in check. When prices changed fortnightly, it led to speculation about the fluctuation of prices leading consumers to behave accordingly. 

Since India imports 84% of petroleum products, any change in the global crude oil prices significantly impacts the prices in the country. If the global crude prices are high, then India, too procures it at a high rate. For instance, Indian Oil Corporation would then pay refineries an amount on each litre of fuel, selling it after that to dealers at a higher rate than it paid refineries. Additionally, excise duty, dealer commission and VAT are added to decide on the retail price.


One of the most important factors is the tax levied by the state and central governments. As of now, fuel has been kept outside the purview of Goods and Services Tax (GST). It has been a common practice in the past to cut duties when global crude prices increased. However, since 2014, the government has been found increasing excise duty even as global prices fell, leading to an increase in the central government's revenue.

Currently, petrol is taxed at a little more than 100 per cent, while it amounts to 66.48 per cent on diesel. Interestingly, while the retail prices have gone up, the price at which the fuel is sold to petrol pump dealers has come down drastically since 2013. The government's effective tax rate on petrol in 2013 was at around 43 per cent and presently it is a little over 100 per cent.

According to the Ministry of Finance's revenue collection estimates, the Centre expects to collect more than Rs 2.579 lakh crore by levying taxes on the petroleum products by the end of this fiscal. This is a massive jump from the gross revenue collection of around Rs 88,600 crore in 2013/14. In the last fiscal the collection was Rs 2.016 lakh crore.

Another factor affecting the prices is the value of the dollar. International prices for diesel, petrol and LPG are priced in dollars. It essentially means that the strength of the local currency against the US dollar vastly impacts the prices. Rupee, currently, stands at Rs 71.56 against the dollar dictating the rise in fuel prices.

(Edited by Anwesha Madhukalya)

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