The fuel prices in India have been rising as days go by, adding to the plight of the common man amid the pandemic. The government¬—the fiend of burden that was meant to ameliorate the citizens’ woes— has now become the burdensome foe whose palate gets costlier with time.
This Post seeks to examine the petroleum pricing mechanism in India and its journey towards complete deregulation to understand the policy surrounding this vexatious issue. It analyzes the factors affecting the domestic fuel prices, mainly the international crude oil market and the taxation component of the retail selling price. Further, it sheds light upon the drastic consequences of the price hike on the transportation sector and essential commodities. Lastly, it recommends short-term and long-term reforms that can be considered by the central and state governments to alleviate the burden borne by the people.
Fuel prices in India have touched an all-time high and are constantly rising as the country fights the pandemic induced economic downfall. As of March 2nd, a litre of diesel in Mumbai costs Rs. 88.60, Rs. 81.47 in Delhi, Rs. 84.35 in Kolkata and Rs. 86.45 in Chennai. Petrol costs Rs. 91.17 per litre in Delhi, Rs. 91.35 in Kolkata, Rs. 97.57 in Mumbai and Rs. 93.11 in Chennai. Although the advent of the COVID-19 vaccination programme has caused a positive change in consumer and business confidence as opposed to the beginning of the pandemic, these prices remain unreasonable for consumers. The soaring prices have even led to illegal trading and smuggling of gasoline and diesel. 
The pricing of petroleum products has a significant impact on economic growth, as was displayed by the rapid postwar growth. To understand the forces at play, it is necessary to trace the evolution of the petroleum pricing policy in India, from regulation to partial regulation to complete deregulation and decontrol. While India has remained susceptible to price increases in the international oil markets, the same is rarely reflected in the case of a decrease in prices. The current regime of decontrol seems like a mere fallacy considering the wide gap between global crude prices and retail selling prices.
The price buildup of petrol and diesel has four components: Price charged to dealers, Excise Duty, Dealers’ Commission and VAT. With the Centre and states having sufficient control over the prices, considering the taxation component, the Government is stuck in a ‘dharamsankat’, with only one way out to appease consumers.
The Rocky Road to Deregulation
The petroleum pricing policy in India has a rich history of its own. Until 1948, no attempts were made to enforce any form of governmental control. Most of the petroleum products consumed were imported. The Valued Stock Account (VSA) is often regarded as the first mechanism of regulation. It was based on the import parity formula according to which the selling price points of major petroleum products were determined. As the market price leader at that time, Burmah Shell maintained separate valued stock accounts for products through an agreement with the Director-General of Supplies and Disposals.  Since the VSA submitted by Burmah Shell was not subject to audit by the Government, it remained ignorant of the sizes and the nature of numerous elements of costs. Consequently, oil companies did not feel the need to economize as prices would rise to cover costs and provide a 10% profit margin.
In 1957, the Parliament agreed to implement a new procedure that would allow the Government to examine the costs. The new pricing policy was inevitable, as stated by the Chief Cost Accounts Officer Sri N. Krishna, to regulate unduly high prices. The import parity principle takes into account landed cost in addition to marketing and distribution charges, to ultimately arrive at the selling price. Owing to the rising prices and ever-increasing foreign exchange outflow, various committees were set up to review petroleum pricing policy in India. The Damle Committee examined foreign exchange conservation and proposed numerous incentives to increase profits including reducing discounts from Free on Board (FOB) prices.  Although a schedule of maximum prices for all major products was declared, the committee was still reliant on the import parity principle.
The Talukdar Committee recommended the determination of ex-refinery prices of refined petroleum products, landed prices, marketing and distribution charges as well as the possibility of linking prices with physical supply areas for products of individual refineries. With respect to the fixed formulas of buildup to carriage, insurance and freight, this committee was in agreement with the Damle Committee, however, it advocated a reduction in prices as well as a cut in foreign exchange allocations.
Due to the devaluation of the rupee, the Government attempted to cancel out its effects on imports while maintaining selling price ceilings, which led to the reexamination of the pricing policy once again. The Shantilal Shah Committee recommended the discontinuation of the import parity principle since the indigenous cost of production was not taken into account appropriately in this formula.  Following the fluctuating crude prices, a new committee was set up to look into the pricing mechanism.
The Oil Prices Committee under the chairmanship of K. S. Krishnaswamy recommended the complete discontinuation of the import parity principle and utilizing the Administrative Pricing Mechanism (APM), which came into force in 1977. This mechanism introduced a system of prices fixed by the Government along with a retention mechanism for refiners, distribution and marketing companies. Consumer prices for products were heavily subsidized whereas prices of products used for industries were kept at a higher cost to balance out the under-recoveries of the subsidized products. However, the cost-plus formula used here was not short of constraints and was dismantled as it could not generate adequate financial resources for oil companies. 
The period after APM saw producers and refiners coming together to determine prices by equating indigenous crude oils to international crude oils. However, prices of petrol, diesel, domestic LPG and kerosene remained under the complete control of the Government. Oil Marketing Companies (OMCs) were allowed to sell at market-determined prices after consultation with the Ministry of Petroleum and Natural Gas. Oil companies set the prices of petrol and diesel every fortnight. However, the rise in international crude prices resulted in the increase in under-recoveries for them.
To counter the shortcomings of price volatility, a new mechanism was put in place whereby oil marketing companies could revise retail prices within a band of +/-10% of the mean of the rolling average of the preceding 12 months and preceding 3 months of international Cost and Freight (C&F) prices. This was known as the Price Band Mechanism.  As oil prices rose sharply, the uncertainty in international oil markets increased, the Price Band Mechanism was abandoned and replaced with Trade Parity Pricing as recommended by the Rangarajan Committee. The formula was a weighted average of import parity and export parity prices, in which the percentage share of import and export of petroleum products provided the weights in the ratio of 80:20. As OMCs kept selling these products below the costs based on Trade Parity Pricing, the Government devised a Burden Sharing Mechanism to meet under-recoveries.
As international oil prices kept soaring from June 2006, the Government halted increasing the retail selling prices of petrol and diesel until two years later, as the under-recoveries of OMCs reached unsustainable levels. At this stage, the Government appointed the Chaturvedi Committee which reiterated that as long as there are price restraints there will have to be a formula to govern the pricing mechanism. The mechanism recommended by the Chaturvedi Committee was primarily meant to address the financial challenges associated with the highly unsustainable level of under-recoveries of OMCs who were not permitted to pass the rise in oil prices on to the consumer-end prices.
To create a viable and sustainable pricing policy, an Expert Group under Dr Parikh was constituted in 2009. Based on the recommendations of this Group and the decisions taken in the meeting of the Empowered Group on Ministers, the Government decided that the prices will be market-determined, both at the refinery gate and the retail level from 26th June 2010, starting with petrol prices.
Although it seemed like petroleum pricing had been fully deregulated, this was far from reality. The Government continued to modulate the retail selling price of diesel, public distribution system (PDS) kerosene and domestic LPG in order to save the common man from the impact of the rise in international oil prices and domestic inflation. In 2017, the Government allowed the linking of daily petrol prices with international crude oil, thereby formalizing the shift from APM to dynamic pricing. 
Import Dependency and the Effect of International Oil Markets
The scarcity of non-renewable sources of energy and the concentration of surplus production in the hands of few nations has led to serious implications on the growth of energy security in countries that have not attained self-sufficiency with respect to indigenous production of petroleum. This imbalance in supply was clearly depicted by the 1973 oil crisis.  India has been highly dependent on the import of crude oil to fulfil the needs of 1.3 billion lives. The consequent vulnerability to oil price volatility has exacerbated over the recent past owing to the rapid growth of the economy that has fueled a proportionate growth in oil consumption.
Theoretically, retail selling prices of petrol and diesel in India are fixed based on global crude prices. Ideally, the pricing policy envisions complete deregulation of consumer-end prices of fuels, including aviation turbine fuel (ATF). Considering the fact that India imports 85% of petroleum products, changes in global crude oil prices directly affects domestic prices.  If the global crude prices are high, India would end up procuring it at a high rate, paying refineries a certain amount on each litre of fuel and selling it to dealers at a higher rate to cover costs and gain profit.
As the economies around the world are beginning to recuperate, crude prices have now been recovering, and the demand outlook has greatly improved. With countries imposing strict lockdowns and placing restrictions on travel, Brent crude price had fallen from $66 per barrel to $19 in April 2020. It started trading at about $40 per barrel between June and October and finally began rising in November, going beyond $60 per barrel as COVID-19 vaccines began rolling out, and has now averaged $63 per barrel. 
Furthermore, with the onset of the pandemic, India had supported production cuts by oil-producing countries in response to a fall in demand. This decision has now come back to haunt India as it affected fuel prices in the country. OPEC countries have been asked not to continue production cuts however, manufacturing countries are not likely to do so considering the profit gained.  Moreover, in India, the production of petroleum products has witnessed a degrowth of 2.5% in the last month. 
Reducing import dependency has been a top priority for India, as it would lead to lower prices in times of high global crude prices, although this has not been proven to have a huge impact on prices as opposed to taxation. As per the Petroleum Planning and Analysis Cell, crude oil imports and exports have decreased by 2.7% and 4.8% respectively in January 2021.  One initiative in this regard has been shifting the focus to ethanol. Ethanol extracted from sugarcane is doped in petrol to mitigate the need for imports. As of now, ethanol makes up 7% of petrol , and this is projected to be raised to 20% in the next 4 years. This would lead to lower prices, apart from providing farmers with a source of income. 
Diversification of energy sources and increasing the use of renewable sources is another way to reduce import dependency. Shifting to cleaner and greener sources of fuel is indeed a step towards energy independence. By 2030, these sources of energy will form 40% of the energy generated, in light of the numerous measures undertaken by the Government to increase its share in renewable energy.
Further, capacity building would considerably reduce import dependency. In 2019, India ranked 4th in refining capacity, with almost 65.2 million tonnes of petroleum product exported. Moreover, emphasis on energy security has increased, with firms based in India venturing overseas for acquiring oil and gas assets. Indian oil companies have marked their presence in 27 countries with an investment totaling up to Rs 2.70 lakh crore.  Reforms in exploration and production, natural gas marketing and distribution as well as investor-friendly measures will eventually make India self-reliant in this sector.
High Taxes on Fuel Prices: Time to take a Hike
Indeed, the indirect component of tax forms a crucial part of the pricing policy. The taxes are levied on the prices of commodities as the cost incurred in producing the commodity or by the consumer in using it.  Indirect taxes, comprising of excise duty, customs duties, sales taxes and VAT, significantly contribute to government revenues. 75% of the tax collection by the Central Government comes from the excise duty levied on domestic crude oil, natural gas and petroleum products. Central and state taxes make up over 60% of the retail selling price of petrol and over 54% of diesel.  The second-largest source of revenue for the Government is the cess levied on crude oil.  Under Section 15 of the Oil Industry Development Act, 1974 cess is levied and collected on indigenous crude oil by the Central Government.  This Act came into being as a response to the continuous increase in international crude oil and petroleum prices during the 1970s.
Deregulation seeks to ensure that consumers pay the actual price of petrol or diesel with no bulwark against the rise in global price, as was seen in 2018 when prices touched nearly $80 per barrel. On the other hand, consumers are supposed to gain if global oil prices fell. Since 2014, central excise duty on diesel and petrol has been steadily increased through continuous revisions. Indeed, revenue from taxes is crucial to fund expenditure. To an extent, higher taxes on petrol and diesel are justified considering the environmental impact. However, deregulation of fuel prices should ultimately benefit consumers when global prices are low, which has rarely been the case.
As crude oil prices plummeted a few months ago, the Government had increased excise duty on petrol and diesel by Rs. 13-16 per litre; while numerous States increased their VAT and sales tax. However, when oil prices started rising, these taxes were not rolled back, which caused fuel prices to soar with consumers bearing the brunt. Recently, the Government amended the Finance Act to get enabling powers to increase excise duty on petrol and diesel by Rs. 8 per litre, which would, in turn, raise the limit to Rs. 18 per litre for petrol and Rs. 12 per litre for diesel. 
Under the price decontrol mechanism, when the global prices of crude oil increases, the burden is passed on to the consumer who pays the extra price for oil. When the global price decreases, the Government levies taxes to ensure that it rakes in revenue, as was seen in 2020 when crude oil was priced around $19.9 per barrel while consumers were paying Rs. 75.28 per litre.  The only way consumers would get solace against the soaring prices is tax cuts, however, the Government has pointed out that import dependency and production cuts are the factors that led to record high prices. 
The Plight of the Common Man: Consequences of the Pricing Policy
The hike in fuel prices has led to the increase of price in commodities, autorickshaw and taxi fares, among other consequences. As offices shifted to the work-from-home model, the demand for taxis and rickshaws had reduced. Taking the example of Bengaluru, although 2 lakh taxis are registered, the number of taxis plying has comparatively decreased.  This in turn has increased waiting time, in addition to the possibility of surge pricing for app-based cabs of aggregators. Now, the increase in petrol and diesel prices has worsened the situation of taxi and autorickshaw drivers, which was abysmal to begin with, thereby adding fuel to the fire.
Even in Maharashtra, where the State Government has decided to set the upper cap on fares for taxis and autorickshaws based on the Khatua Committee Report,  the consumer rights groups have requested to decrease the fares in light of the financial difficulties that consumers are facing.  Passing off the burden to the consumers is prejudicial and counter-productive since customers in the passenger transport sector are price-sensitive buyers. 
Inevitably, the transportation sector, being the second-largest energy consumer in India, has taken the hit.  The rise in fuel prices directly impacts the running cost of vehicles, the profitability of vehicle owners and the sustenance of businesses that completely rely on transportation. The discernible change in how goods are transported will have a cascading effect on essential commodities. With the rise in diesel prices, lorry and truck drivers who transport commodities like food grains and vegetables will pass the cost to retailers, who will consequently pass it on to the consumers to accommodate their retail margin. 
Needless to say, it was not long until people took their agitation to the streets. The Confederation of All-India Traders called for a Bharat Bandh on February 26th in protest against the soaring fuel prices, Goods and Services Tax and the e-way Bill. The All-India Transporters Welfare Association had extended support to the call for Bharat Bandh and held a chakka jam as well. Whether this has been fruitful or not is yet to be determined.
It can be argued that the incessant increase in fuel prices would prompt people to shift to clean energy and electric vehicles, however, these are long term effects that would only be realized in the post-COVID-19 landscape. Similarly, the shift to public transport and other mobility options like carpooling would not be ideal during a pandemic. The current quandary is indeed a wake-up call for the Government to provide better options for vehicles and create sustainable solutions for the transportation sector and its stakeholders, including the passenger segment, bus segment and freight transport segment.
Need for Bold Reforms
The petroleum sector had been often characterized as being regulated with cyclical tendencies, owing to policy changes as opposed to economic or business repercussions.  Subsequent to the deregulation reforms, there was a glimmer of hope for incremental reforms. However, the current scenario depicts otherwise.
It goes without saying that the sector requires bold reforms, which would considerably reduce the oscillation to and fro from complete deregulation, in addition to providing clarity regarding central and state taxes. The crisis at hand cannot be a wasted opportunity. Considering the global production cuts, increase in taxes by Central and state governments and the cutting of imports, the pricing policy reforms need to redefine the mechanism to protect consumers against highly volatile periods, especially when the economic growth rate itself has contracted amid the pandemic. 
It can be observed that the Consumer Price Index-based inflation rate has risen at 5.5% due to the sky-high petrol prices.  The rise in fuel price has started nipping the common man, which will eventually have a cascading effect on economic development. Whenever there is a downward revision in prices, a corresponding adjustment in prices by the suppliers or service providers are rarely seen. It is hence imperative that proactive supply-side measures are taken to unravel the high tax implications.
Even with the global prices recovering, state governments have the responsibility of ensuring that the prices are viable, in consideration of the financial implications of the pandemic. RBI governor has called for a reduction in indirect taxes to bring prices to a reasonable level. Numerous states, including Rajasthan, Assam and West Bengal, have made tax cuts going on to prove that the first step in dealing with the dilemma at hand is to reduce taxes that form the major component of the retail selling price.
Moreover, the Government has been working towards raising the share of natural gas in the energy basket to 15% and to bring it under the Goods and Service Tax (‘GST’) regime to ensure the elimination of the multitude of taxes across various states, which would, in turn, decrease the cost of gas. When the GST subsumed over a dozen central and state taxes in 2017, five products namely crude oil, natural gas, petrol, diesel and ATF were omitted. This meant that taxes paid on inputs could not be offset by taxes on the final product. It is time the Government considered subsuming petrol as well which would ensure the admissibility of crediting the input tax paid.
The vacillations in the fuel prices could hence be disappointing and disheartening for the commoner who would instill faith in the regulators only to be let down once again. The common man asks what do these fluctuations mean? One could start by clarifying that as Indian citizens the authors have read and studied pieces and combinations of those theories which lay out the rationales behind the regulation and deregulation mechanisms. We think that while the disparaging pricing modality has saved a section from personal consequences whose position is privileged; it has made the rest bear the brunt of the aforesaid bane. Been conscious of these two, it is the opinions and consequences faced by the latter that should be considered seriously.
Belonging to the largest democracy in the world, where elections are on the basis of adult suffrage, the question to reflect upon would be as to what good would it be for the people to feel disenfranchised from the country’s (un)intentional discriminatory approach adopted towards the fuel pricing system.
The approach therefore for ensuring adequate representation of all stakeholders would be to not perceive the problem in isolation. The objective should be to formulate policies by factoring in the facets of the issue that would drive towards undertaking sustainable decisions. They have to be not just legitimate and seemingly rational in the present circumstances but are able to stand the test of time and are morally responsible too. It is through empathy and engagement with the people’s needs that the mandates set out would fructify into long-lasting commitments which the country endeavours to make to its people.
The country could be further than where it should have been, in terms of the Government carrying out its affirmative duties and vociferously trying to bridge the gap between the consumers from those in a position of privilege. However, all is not lost as in the words of Swami Vivekananda ‘Arise, awake and stop not till the goal is achieved.’
About the Authors
Rashna Jehani is a corporate lawyer pursuing her second masters in business administration. She has worked across law firms and gained an exposure to a mix of corporate/M&A, project finance/infrastructure, and structured finance transactions and has undertaken some amount of dispute resolution work. She was previously a Senior Associate at Advaya Legal.
Hamna Viriyam is a 3rd Year Law Student at the National University of Advanced Legal Studies (NUALS), Kochi and is an Associate Editor at IJPIEL.
Managing Editor: Naman Anand
Editor in Chief: Akanksha Goel
Senior Editor: Aakaansha Arya
Associate Editor: Hamna Viriyam
Junior Editor: Swadha Sharma
Preferred Method of Citation
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