How expensive is petrol in India?

On Sunday, PTI reported that the retail price of petrol in India has gone up by Rs6 over the last month, an increase of nearly 10%. This has caused retail prices to reach a three-year high. This increase coincided with oil marketing companies shifting to a daily adjustment in retail prices of petrol and diesel in June. For 15 years prior to that, prices were being adjusted fortnightly.

It has become a common narrative in the last three years, ever since global crude oil prices crashed, that the Union government in India hasn’t passed on the benefits of the fall to customers, instead choosing to shore up government finances by hiking taxes.

Chart 1 compares the retail prices of petrol and diesel in Delhi since 2004 with the price of the “Indian crude basket” (a mix of “sour grade” and “sweet grade” crude oil in the ratio that is used by major refineries in India). The latter number is normally expressed in terms of dollars per barrel, but for purposes of comparison, it has been converted to rupees per litre (using the prevailing exchange rate on the respective dates and the fact that a barrel holds about 159 litres of crude oil).

It is evident from chart 1 that while the retail prices of petrol and diesel dropped in late 2014, the drop was in no way comparable with the drop in price of India’s crude oil basket. Once again in 2015-16, when crude prices dropped precipitously, diesel and petrol retail prices held firm.

As an aside, chart 1 also clearly illustrates the way diesel prices were managed during the second term of the United Progressive Alliance (UPA) which was in power between 2009 and 2014, and the fact that petrol and diesel prices were perhaps kept artificially low in 2008 when there was a global surge in crude oil prices.

While the chart illustrates that the drop in global crude prices haven’t been passed on to the consumer, in order to effectively understand the extent to which the drop has been “absorbed” by the government, we need to look at relative prices. To put it simply, how many litres of wholesale crude (“Indian basket”) buys one litre of petrol or diesel in the retail market? The following chart illustrates this quantity.

A few months after the current government came into power in 2014 (black vertical line in the chart), global oil prices crashed. As chart 2 clearly illustrates, this drop was not passed on to customers, with excise duties being increased instead. In fact, the ratio of prices of petrol to crude, which was well under 2 during the UPA years, hit a high of 5 in early 2016. The number has now stabilized at around 3.3. The story with diesel is somewhat similar.

Again as an aside, chart 2 shows the management of fuel prices in the early 2000s, when increasing global prices did not translate to increased retail prices, with the government choosing to offer subsidies. Instead, what we got was a one-time shock of increased prices in late 2008, at the very peak of the crisis!