If retail sale price of petrol and diesel is as high as it was when the global crude price was twice as high, state-run oil marketing companies haven’t much do about it: Their profits haven’t jumped. Of course, these firms haven’t been suffering from under-recoveries since daily pricing of petrol and diesel was made effective on June 16 last year. Their refining margins are, however, being kept well within the trade-parity pricing formula allowed by the government and marketing margins have remained more or less the same during the period since deregulation. The latest spike in retail fuel prices is because the global oil product prices (which influence trade parity prices for OMCs) have increased owing mainly to the hurricane Irma in the US and states’ VAT too have risen as a result. The freight on board (FOB) prices of petrol an diesel increased 20% each in the global market over the last three months, but domestic retail selling prices of these products increased by around 8% only, an OMC official said, citing data.
In a recent article in The Indian Express, noted energy expert Kirit Parikh, who was member of the erstwhile Planning Commission, said the increase in fuel prices won’t jack up the Centre’s revenue as excise on petrol and diesel is specific, instead of ad valorem (it is another matter that the excise on diesel increased 386% and that on petrol by 126% between October 2014 and September 2017). But since state VAT being ad valorem, these contributed to the recent increase in prices. It may also be noted that the states get 42% of the divisible pool of the central taxes. “To a large extent, Indian petroleum prices are dependent on international product prices. The local prices are not directly linked with crude prices and predominantly driven by demand and supply,” said the OMC official.
Under trade parity pricing (TPP), domestic fuel prices are determined by adding import parity price (IPP) — with 80% weight — and export parity price (20% weight). The IPP is based on the FOB price of Euro IV-compliant diesel and petrol prices in the Arab Gulf market and includes freight, insurance, customs duty and factors in exchange rate variation (see table showing how the retail petrol price is built up). Data show that TPP, also referred to as refinery transfer price (RTP) or the price at which diesel or petrol is available at refinery gate, has moved in tandem with the benchmark Arab Gulf market prices (see chart). Moving average price of last 15 days is used by the OMCs to arrive at RTP. “It is being done in such a way that any spike on a single day for any reason should not impact prices significantly,” said the official.
For instance, during the recent cyclone in the US, 13% of that country’s refinery capacity shut down. This led to a shortage of petroleum products because the US’ coastal refineries not only feed to the US but also to markets such as the South America and other regions. One should also keep in mind that the current hike in fuel prices is also partly due to hike in dealer commission which started on August 1. Though OMCs staggered the increase in dealer price, it has steadily gone up to an average of Rs 2.5 per litre of diesel from Rs 1.65, and to an average of Rs 3.57 per litre of petrol from Rs 2.55. While dealer commission was uniform earlier, it is slab-based at present wherein dealers with higher volume get lower commission. “Dealer commission was to a certain extent responsible but we had not implemented it overnight but staggered it so that change in price is not very drastic. Now the increase in dealer commission is built in the prices,” said the OMC official.
Though many Opposition-ruled states are up in arms against fuel price increase, they have also benefitted from the spike in tax revenue on petroleum products. “Apart from the central excise duty, the sale prices of diesel and petrol have increased because of the very high VAT rates imposed by the states. These vary from state to state. Madhya Pradesh imposes a VAT rate of 40% on petrol and 32% on diesel. The lowest rates are in Mizoram: 20% on petrol and 12% on dieselm,” Parikh wrote. According to Petroleum Planning and Analysis Cell data, VAT is as high as 47% in Maharasthtra on petrol and 31% on diesel in Andhra Pradesh.