Opinion: Crude prices in a freefall but petrol and diesel prices keep rising, it’s a “made in India” solution for tackling a recession

| March 03, 2021 | Updated 1:42 pm

Opinion: Crude prices in a freefall but petrol and diesel prices keep rising, it’s a “made in India” solution for tackling a recession Representational Image (Courtesy: Pexels)

For many, it’ll be a puzzle. Why did retail prices of petrol keep rising through the lockdown and the pandemic despite a freefall in crude prices in April last year?

At one point West Texas Intermediate crude was about a negative $37 per barrel, unprecedented but not surprising given large swathes of the global economy shut down, leading to a complete collapse in demand. But amid all this, retail prices of petrol and diesel kept spiking in India.

Sample this. When the lockdown was announced towards the end of March 2020, petrol and diesel were about Rs 70 and Rs 62 per litre. By September, they were about Rs 88 and Rs 80 respectively, rising between 25% to 30% at a time when the Indian economy was largely shuttered. So, what explains this puzzle?

Simply, the Indian government kept on raising excise duties on fuels to compensate for the collapse in other sources of direct and indirect tax revenues, such as GST and corporate taxes. With the government raising excise duties in tranches, the government’s excise duty collection is expected to surge 35% over the Budget estimates, from Rs 2.67 lakh crore to Rs 3.61 lakh crore according to the revised estimates. This even as fuel consumption in this fiscal year would have obviously fallen in the current fiscal (2020-21) because of the pandemic-induced lockdown. And even as other sources of revenues dried up. Corporate tax collections, for instance, is estimated to have been 35% below Budget estimates for 2020-21.

But, now with the global economy pulling out of the hole, it was in last year, and a subsequent demand recovery – as seen in the pick up in auto sales and rising GST numbers in India – it’s a different problem at hand for the Indian government. Crude prices are mounting again and have already risen 50% from the levels seen last October and will likely remain under pressure over the next few months. With the Centre and the state governments not very keen to lower duties immediately (except perhaps those states headed for elections now) to compensate for the shortfall in revenues, retail prices will remain elevated.

So, what is the possible scenario in the future? The centre and the states may be willing to cut duties as other sources of revenue pick up – such as GST – with the economy reopening, but retail or pump prices will also take a cue from how the pandemic plays out globally in the days ahead, and that is far from clear right now. We’ve seen second waves in many parts of the world, including in India, and any demand shock will keep crude prices in check. But if the vaccination drive helps humanity win the battle against the pandemic, crude prices and retail prices of fuels will come under pressure and rise further.

Petroleum Minister Dharmendra Pradhan believes some of the pressure on crude prices could ease soon. “Increase in petroleum price in the international market has affected consumers too. Prices will come down a little as winter goes away. It’s an international matter, price is high due to increase in demand, it happens in winter. The price will come down,” the petroleum minister told news agency ANI.

Let’s hope he is right, fingers crossed. But it’s not so simple.