As you refuel your car or bike, you might be aware that fuel prices in India are steadily climbing. Many are curious about the reasons for this continuous rise.
Today, let’s explore the main factors driving fuel prices to skyrocket and what steps the Indian government is taking in response.
Factors Affecting Fuel Prices in India
- Impact of Foreign Markets
The international price of crude oil directly affects fuel prices in India. These prices can fluctuate due to various reasons such as global political tensions and changes in supply and demand. For example, the Russia-Ukraine war and the Iran-Israel conflict contribute to rising fuel prices. Since India is a crude oil-importing country, global market fluctuations directly impact fuel prices in India. - Currency Exchange Rates
When a country imports crude oil, it pays according to the currency exchange rate. A significant portion of India’s crude oil import bill is in dollars. If the rupee weakens, more rupees are required to buy crude oil in dollars, directly affecting fuel prices. - Refining Costs
After purchasing crude oil, it is processed in refineries to produce petrol, diesel, etc. Therefore, refining costs also affect fuel prices. - Tax Burden
The central government imposes excise duty, and state governments impose VAT. Both types of taxes directly impact the prices of petrol and diesel. In recent years, the government has significantly increased excise duty.
Impact of High Crude Oil Prices on India
India is a net importer of crude oil, so a spike in international crude oil prices directly affects the country’s economy.
- Increase in Import Bill – Higher crude oil prices can increase India’s import bill.
- Rise in Inflation – Increased transportation costs can lead to higher prices of goods, resulting in inflation.
- Slowdown in Economic Growth – High fuel prices can affect economic activities, slowing down the economic growth rate.
How Are Petrol and Diesel Prices Determined?
Crude oil is a natural resource, and India imports crude oil rather than petrol and diesel. It is processed in refineries to produce petrol, diesel, and other fuels.
Before 2017, the Indian government determined fuel prices. However, a dynamic fuel pricing method was introduced, allowing state-run oil marketing companies (OMCs) to set petrol and diesel prices. Refineries import crude oil, process it, and sell it to OMCs. The OMCs then decide the prices of petrol and diesel, updating them every morning at 6 AM.
Focus on Indigenous Fuel
To reduce dependency on imports, the Indian government has initiated several reforms to promote domestic oil and gas production. India imports about 83% of its crude oil and 47% of its natural gas needs.
This graph depicts the import and domestic oil production in India from FY16 to FY24 (January).
The Central Budget for 2022-23 reduced customs duty on some key chemicals used in petroleum refining, like methanol, acetic acid, and heavy feedstock, helping to lower refinery costs.
In May 2022, the government approved changes to the biofuel policy, aiming to blend 20% ethanol in petrol by 2025-26, ahead of the previous 2030 target. Ethanol is sourced domestically and is environmentally friendly, reducing both imports and pollution.
What’s Next?
According to IBEF, India is the third-largest consumer of oil and gas globally, with continuously rising energy demand. It is estimated that India’s fuel demand will increase by 40% by 2030. To meet this growing demand, India is focusing on increasing domestic production and reducing import dependency.
The Indian government is taking several steps to strengthen the oil and gas sector, including promoting foreign direct investment (FDI). The government has allowed 100% FDI in upstream and private sector refining projects. Additionally, India aims to double its refining capacity to 450-500 million tons by 2030.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*This article is for informational purposes only. This is not investment advice.
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