The petrol and diesel prices in India are on upward steep. In Delhi,  the price of petrol was 73.73/liter at the beginning of the financial year 2018-19 and today it is Rs.82.66/liter. The fate of diesel is no different to that of petrol. The following statistics would provide a fair bit of idea of how big the problem is.

VAT Charges on fuel (Source: Money Excel)

Why is this happening? 

There are internal as well as external reasons for the hike in the prices of these hydrocarbons. The price of crude oil in the international market is increasing. This is because the organisation of petroleum exporting countries such as Russia are limiting their crude production (probably to increase their profits?). Petrol and diesel are byproducts of crude oil and so it is natural to have a direct effect on their price as well.

US sanctions have restricted crude oil imports from Iran thus India is importing crude oil from the US, which is costlier. Also, the Indian rupee is depreciating against the US Dollar making the import of crude oil more challenging.

Apart from this, there are certain internal factors influencing the price of petrol and diesel. Here we specifically take the cost structure of petrol. The cost of crude oil is around 71USD/barrel (1barrel=159 liter) adding to this the ocean freight at 1.5USD/barrel. Cost of crude oil =33 INR/liter (approx) (assuming 1USD=73INR). The cost of refining for petrol and freight is around 4INR/liter. Thus basic cost of petrol is Rs. 37/liter. Petrol and diesel are outside the purview of goods and services tax thus is subject to excise duty and value-added tax. The central government levies a total of Rs 19.48 per liter of excise duty on petrol thus price charged to dealers is Rs.  57/liter. Add to this dealers commission of around Rs.3/liter (after the upward revision). The state government levies value added a tax on it at a rate of 27 per cent (New Delhi) which effectively makes the price of petrol for final consumers to nearly 80/liter.

(Credits: The Times of India)

What can be done? 

The common man had deeply resented the sharp increase in the prices and has held the Modi government responsible. The central government has little to do with the external factors but as far as internal factors are concerned the government has a pivotal role to play. As we have seen half of the cost is in the form of taxes imposed by the different governments. The respective government can surely decrease the excise duty and vat on petrol and diesel but if it reduces as little as 2/liter then it will lose around 72 lakhs per hour. This will pose a huge burden on the government treasury and can aggravate the problem of fiscal deficits which further leads to more severe economic problems.