June 27, 2021

Political Economy of Higher Prices of Petroleum Product

K Nageshwar

MANY arguments are floated to defend what is rather indefensible. The unprecedented rise in the prices of petroleum products has the potential to make governments unpopular.

The argument often put forth is that prices of petroleum products are determined by global market forces. The governments have no role to play.

Prices of petrol and diesel were indeed deregulated in 2010 and 2014 respectively, though India has done away with administrative pricing mechanism (APM) during the first NDA regime in 2002. The prices of petrol and diesel remained stable in the run-up to assembly elections in five states and started rising immediately after the election results were announced on May 2, 2021. This only reveals the possible role the government can play in taming the fuel prices that can have a cascading effect on the overall inflation which is already spiraling. 

The comparison of crude oil prices in the global market and the retail prices of petrol and diesel in the domestic market reveals how fallacious the argument is. It is true that the global crude oil prices are firming up since the beginning of this year. The crude oil prices in the global market increased from around $52 per barrel early this year to $71 on an average in recent days. But, the global crude oil prices stood above $101 per barrel in June 2013, when the price of petrol was Rs 63 per litre and Rs 77 per litre even if adjusted against fluctuations in the dollar-rupee exchange value. The price of petrol in the domestic retail market is about 30 per cent higher than what it was in 2013 even when the global crude oil prices are less by 30 per cent.

The global crude oil price was around $80 per barrel in October 2018 when the price of diesel in the domestic retail market was around Rs 76 per litre. Now the price of diesel is far high even when the crude oil price in the global market is less than what it was in 2018.


The BJP leaders often claim that the NDA government has repaid oil bonds worth Rs 2 lakh crores along with a whopping interest payment. Therefore, the higher taxes on petroleum products now are a result of UPA legacy.

The ruling party leaders cite no documentary evidence to substantiate this claim. But a perusal of the budget documents reveals otherwise. The central government's response to a question in Rajya Sabha to this effect reveals the absurdity of the claim. The union minister for petroleum and natural gas in a reply to an unstarred question number 296 by Ahmed Patel on December 12, 2018 stated as follows:

“The Special securities of the nominal value of  Rs 3500 crore was paid off in March 2015 (maturity date)…  The annual aggregated amount of  Rs 9,989.96 crores was paid every year during 2015-16 to 2017-18 and the similar amount is required to be paid in the current financial year”.

An investigation by fact check website Factly is further revealing.

“As per annexure 6E of the receipt budget 2014-15, titled ‘Special Securities Issued to Oil Marketing Companies in Lieu of Cash Subsidy’, the total value of pending oil bonds by the end of 2013-14 was Rs 1,34,423 crore. This is when the NDA government took over… The only set of bonds due for maturity during the 2014-19 period (the Modi government's term) were the two sets of bonds that matured in 2015,  totaling Rs 3500 crore… As per 2E of the receipt budget of 2019-20, by 2018-19, the liabilities stand at Rs 1,30,923 crore”. 

As per the document titled ‘Interest Payments’ in the demand for grants of the ministry of finance under the expenditure budget,  the UPA-2 paid a total of Rs 53,163 crore in interest for oil bonds in the five-year of the period between 2009-10 and 2013-14. On the other hand, the current NDA government paid a total of Rs 50,216 crores in the five year period between 2014-15 and 2018-19.

Therefore, the NDA government has not spent any unusual amounts on either repayment of oil bonds or interests on them. Nobody knows where the figure of Rs 2 lakh crore has come from?

A recent Business Line report indicated that Modi government even in its second term would only incur Rs 41,150 crore towards the redemption of UPA-era oil bonds. Therefore, the talk of Rs 2 lakh crore is a propaganda concoction of the saffron brigade in its desperation to defend anti-people hike in petro prices.


The prices of petroleum products are high precisely because of massive taxes levied by both central and state governments. Taxes account for over 60 per cent of the price consumer pays in the retail market. The centre has been cornering a lion’s share of the taxes and duties on petroleum products. The central government has been levying different types of cesses on petrol and diesel which are not shared with states. Thus, petrol and diesel have been important revenue sources for governments. This trend continues to increase as the consumption of these commodities is inelastic to prices.

Central excise collection for the year 2020-21 has increased from Rs 267,000 crores of the budget estimates to Rs 361,000 crores in revised estimates, according to Receipt Budget, 2021 – an increase of Rs 94,000 crores in tax collection as compared to the budget estimates. The budgeted fuel tax for 2021-22 stands at Rs 3.2 lakh crore. Thus, the government has mopped up huge revenues taking advantage of low global crude oil prices. Thus, the consumer is not benefitted when the crude oil prices in the international markets sharply decline; but is levied the burden of higher global crude oil prices.


The imperative to combat climate change is also being drawn into the discussion of fuel prices. Petrol and diesel are fossil fuels, whose consumption increases the carbon footprint contributing to global warming. Therefore, the argument in defence of higher fuel prices is that it contributes to the fight against climate change by discouraging consumption. But the empirical evidence tells a different story.

According to research from ICICI Securities, India consumed 7.8 million tonne (MT) of petrol in the fourth quarter ended March 2021, a 9.7 per cent jump as compared to 7.12 MT of the fuel consumed in the same quarter previous fiscal year (2019-20), despite record-high prices. Consumption of diesel also increased 4.1 per cent to 20.60 MT during the January-March 2021 quarter.

According to forecasts released by Petroleum Planning and Analysis Cell, overall consumption of petroleum products is expected to rise 9.8 per cent year-on-year to 215.24 million metric tonnes in 2021-22.

Therefore, incentives to non-conventional sources of energy, vibrant public transport, improved road infrastructure, encouragement to electric mobility, etc will reduce the dependence on fossil fuels. A mere hike in fuel prices will only end up imposing a higher burden on the consumer who is already reeling under high inflation.


People in power often use the argument that governments in the welfare state need to mobilise resources to finance their expenditure. At a time when revenues are falling owing to the pandemic and mandated expenditure commitments remain high, the governments have no option except to tax fuel. This argument misses the point that the average Indian is under greater fiscal duress than the government during the pandemic. Higher fuel inflation further pinches the common man.

The central government has forgone nearly Rs 1.45 lakh crores in 2019 by reducing the corporate income tax by ten per cent. During this year itself, the center received total tax revenues from petrol and diesel to the tune of Rs 2.4 lakh crores. Thus the common man pays huge taxes on petrol and diesel to finance the incentives given to the corporates. The lower corporate tax has not contributed to the creation of higher national income or jobs. The GDP contracted by 7.3 per cent during 2021. The listed companies’ profits registered a massive increase owing to wage cuts and job cuts. How it is therefore justified to ask the average Indian to finance corporate profits?