Petrol prices remain high across India with the price being close to 100 rupees per liter in New Delhi, the nation’s capital. The petrol hike has made citizens miserable as they find it difficult to afford essential commodities and transportation in their day to day lives. These soaring gas prices remain high and keep rising despite India announcing that it is getting oil at a cheaper price from Russia.

What is the current context of gasoline prices in India? How is petrol price calculated in the first place? And will Indians see any respite at petrol pumps anytime soon? These are….the core questions.

Prior to the pandemic, in 2020, an owner of a two wheeler was paying approximately 900 rupees for a full tank of fuel. Today that cost is around 1500 rupees. To make things worse, petrol prices in India have been on the rise in recent months. According to the Ministry of Petroleum and Natural Gas, the average retail price of gasoline in India was Rs. 89 per liter in February 2023. This is a 1 rupee increase from the previous year, when the average retail price was Rs. 88 per liter.

Why is an increase happening?

The factors driving this increase include a rise in international oil prices, fluctuations in the exchange rate between the Indian Rupee and the US Dollar, and changes in taxes and duties levied by the government. Refining costs also play a role in determining gasoline prices. That’s a lot of complicated terms at once. What do all of them mean and how is the price of petrol determined? The price of gasoline in India is determined primarily by 4 factors:

International oil prices: This refers to the price of crude oil, which is the primary component of petrol. The price of crude oil is influenced by global supply and demand, geopolitical tensions like the Russia-Ukraine conflict, and changes in the market due to the ongoing COVID-19 pandemic.

The exchange rate between the Indian Rupee and the US Dollar also affects the price of gasoline in India as oil is priced in US dollars. At present, a weaker Rupee is increasing the cost of importing oil into India, leading to higher gasoline prices.

Let me give you an example. Suppose you go to the mall and spend 5000 rupees on shopping. Your total expense for the day is not just 5000 rupees. Keep in mind your uber also cost you 200 rupees to get to the mall and to come back home. Therefore, in actuality, your total expenditure for the day was 5400/-.

Refining costs also play a role in determining gasoline prices. The cost of refining crude oil into gasoline can be impacted by changes in the cost of raw materials, labor, and energy.

Taxes levied by the Indian government also have a significant impact on the retail price of gasoline in India. Taxes and duties account for more than 50% of the retail price of gasoline in the country. This means if your petrol bill is 1000 rupees, over 500 rupees are because of taxes and duties.

It’s easy to blame the government for not reducing the tax on petrol. In fact, those who are criticizing the current government seem to forget the fact that during the previous UPA government which was in power from 2004-2014, taxes on petroleum were high and the UPA government raised the tax not once, but several times to help meet its fiscal targets. The reality is, that no matter who is in power in India right now……the petrol prices would be high in India because the price of crude oil is also significantly high. And also because the decision to reduce taxes on gasoline, including petrol, is a complex one that requires careful consideration of several factors.

For starters, the Indian government collects taxes on gasoline to generate revenue that is used to fund various public services and infrastructure projects. The current Modi government has made infrastructure development a top priority and has invested hundreds of billions of dollars to finally get much needed modern infrastructure into India. One example is the Sagarmala project, which focuses on port-led development. This is estimated to cost over $120 billion.

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