In India, in recent times, whenever crude prices have been on the rise, Indian consumers have faced the burden of the price rise. However, when crude prices dropped, the Centre’s excise duty was increased in proportion to the drop, and consumers continued to pay more. This trend changed somewhat when the government slightly reduced the excise duty of petrol and diesel in November, and some State governments reduced VAT. However, the crude prices are ascending faster now and are expected to be on the same path for quite some time. Due to upcoming State elections, the retail prices are delinked temporarily from crude prices and continue to remain at a relatively lower rate. However, once the polls are over, the retail prices may go up again.

Crude price vs pump price

The chart depicts the crude price – Indian basket (left axis) and the retail petrol price in Delhi (right axis). Since late-2014, crude prices have crashed on multiple occasions. But this has rarely translated into a reduction in retail petrol prices. However, a rise in crude price has always been accompanied by a parallel increase in the retail price.

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A change in trend

The general trend changed in November as the government cut the excise duty and some State governments followed suit with a cut in VAT. The graph shows the build-up of the retail petrol price in Delhi.

Pausing for elections

The graph shows the retail petrol price in four metros. The retail price is linked to the international crude oil prices and that is why it changes every day. However during election season, this movement comes to a halt to woo the voters. With crude prices rising, the margins of oil marketing companies will take a hit if these companies continue to sell at unchanged prices. And so, to recover the loss, they are expected to increase the prices after the polls.

Prices were frozen before the five State elections in March-April 2021. They froze again for the upcoming polls in States including U.P.

Revenue through excise duty

Given that the crude prices may increase further in coming days, one way to keep the retail prices in check is by lowering the excise duty component. The chart shows the revenue earned by the Centre through excise duty on petrol and petroleum products. The Centre’s revenue rose sharply in FY2021 after the hike in excise duty. The Centre collected ₹3.7 lakh crore in FY21.

Source: PPAC