What Happened
- Despite a 41% decline in global crude oil prices since June 2022, Indian petrol prices have been cut by barely 1.9% during the same period.
- Analysts highlight an asymmetric pricing pattern: oil price spikes are passed on to consumers promptly, but the benefits of falling prices are not.
- The pricing asymmetry has persisted despite the government's stated policy of daily dynamic fuel pricing.
- Oil marketing companies (OMCs) and the government have used the price gap to recover past losses and maintain government revenue (excise duty on fuel).
- The frozen retail prices effectively function as an indirect tax, transferring the benefits of lower crude prices from consumers to government coffers and OMC balance sheets.
Static Topic Bridges
India's Fuel Pricing Mechanism -- Deregulation and Practice
India deregulated petrol prices in June 2010 and diesel prices in October 2014, allowing Oil Marketing Companies (IOC, BPCL, HPCL) to set retail prices based on international crude prices, exchange rates, and refining margins. Daily dynamic pricing was introduced on June 16, 2017, replacing the fortnightly revision system. In theory, retail prices should closely track global crude prices with a predictable margin. In practice, OMCs have periodically frozen prices -- notably before state elections and during politically sensitive periods -- creating an asymmetric price transmission mechanism.
- Petrol deregulation: June 2010 (UPA government); Diesel deregulation: October 2014
- Daily pricing: introduced June 16, 2017; prices revised at 6 AM daily based on previous day's international prices
- Retail price composition: crude cost + refining margin + freight + dealer commission + excise duty + VAT/state tax
- Excise duty on petrol: Rs 19.90/litre; on diesel: Rs 15.80/litre (post-November 2021 reduction)
- Excise duty was hiked from Rs 9.48/litre (2014) to Rs 32.90/litre (May 2020) during low crude prices
- November 2021: excise cut by Rs 5 (petrol) and Rs 10 (diesel) ahead of state elections
Connection to this news: The 41% crude price decline not translating into proportionate retail price cuts demonstrates that deregulation remains incomplete -- OMCs and the government exercise de facto pricing control, using periods of low crude prices to rebuild margins rather than passing benefits to consumers.
Excise Duty on Petroleum Products -- Fiscal Instrument
Petroleum products (petrol, diesel, aviation turbine fuel, natural gas, crude oil) are excluded from GST and continue to attract Central Excise Duty and State VAT/Sales Tax. This makes fuel one of the most heavily taxed commodities in India, with taxes constituting approximately 55-60% of the retail price of petrol. Central excise on petroleum products contributed approximately Rs 3.4 lakh crore (2024-25) to government revenue, making it a critical fiscal resource. The exclusion from GST is partly due to revenue concerns -- bringing fuel under GST would dramatically reduce the tax component and create revenue shortfalls for both Centre and states.
- Petroleum excluded from GST: decision deferred by GST Council; requires constitutional amendment of Article 279A
- Central excise revenue from petroleum (2024-25): approximately Rs 3.4 lakh crore
- State VAT/sales tax on petroleum: varies by state; ranges from 15% to 36% of pre-tax price
- Combined tax burden: approximately 55-60% of petrol retail price; approximately 50-55% of diesel retail price
- Petroleum subsidy: effectively eliminated for petrol (2010) and diesel (2014); continues for LPG and kerosene
- Oil bonds: Rs 1.34 lakh crore issued (2005-2010) to compensate OMCs for under-recoveries; repayment ongoing
Connection to this news: The government's decision to keep retail prices largely unchanged despite falling crude prices is partly explained by fiscal considerations -- lower crude prices increase the effective revenue margin without increasing nominal tax rates, helping bridge fiscal deficit targets.
Administered Pricing Mechanism -- History and Evolution
Before deregulation, India had an Administered Pricing Mechanism (APM) for petroleum products (1977-2002), under which the government set retail prices and compensated OMCs through a cost-plus formula. The Rangarajan Committee (2006) recommended market-based pricing for petrol and diesel, while the Kirit Parikh Committee (2010) specifically recommended deregulating diesel prices. The transition from APM to market pricing was completed by 2014, but the current practice of periodic price freezes represents a reversion to implicit administered pricing.
- APM period: 1977-2002; government set prices; OMCs compensated via Oil Pool Account
- Dismantling of APM: phased (2002-2014); petrol freed (2010), diesel freed (2014)
- Rangarajan Committee (2006): recommended market-based pricing; implemented for petrol in 2010
- Kirit Parikh Committee (2010): recommended complete decontrol of petrol and diesel prices
- Under-recovery: the difference between cost-based price and actual retail price; peaked at Rs 1.6 lakh crore (2012-13)
- Current status: nominally deregulated, but OMCs follow implicit government guidance on pricing decisions
Connection to this news: The gap between the stated policy of daily dynamic pricing and the reality of prolonged price freezes during falling crude prices effectively represents a return to administered pricing, albeit informally and without the transparent subsidy framework of the APM era.
Key Facts & Data
- Global crude oil price decline since June 2022: approximately 41%
- Indian petrol price reduction since June 2022: approximately 1.9%
- Excise duty on petrol: Rs 19.90/litre; on diesel: Rs 15.80/litre
- Taxes as share of petrol retail price: approximately 55-60%
- Central excise revenue from petroleum (2024-25): approximately Rs 3.4 lakh crore
- India's crude oil import dependency: approximately 89%
- Oil bonds outstanding: Rs 1.34 lakh crore (issued 2005-2010)
- Daily pricing introduced: June 16, 2017