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Explained: What is the reason for the high petrol and diesel prices?

Petrol and diesel prices: Petrol has crossed the Rs 100 mark in at least six states as a result of a Rs 4.9 per litre hike in its price since the beginning of May.

Union Petroleum Minister Dharmendra Pradhan on Monday blamed a “surge in global crude oil prices” for the rising domestic prices of petrol and diesel.

Petrol has crossed the Rs 100 mark in at least six states as a result of a Rs 4.9 per litre hike in its price since the beginning of May. In Mumbai, petrol is retailing at Rs 101.5 per litre, while diesel is retailing at Rs 93.6 per litre after total hikes of Rs 11.6 per litre and Rs 12.4 per litre, respectively since the beginning of the year.

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The Indian Express examines the role of rising crude oil prices, and taxes on the recent surge in autofuel prices.

How have rising crude oil prices impacted fuel prices?

The price of crude oil has risen sharply in 2021 on the back of a recovery in global demand as the world economy recovers from the Covid-19 pandemic. The price of Brent crude has risen by 37.1 per cent to about $71 per barrel from about $51.8 per barrel at the beginning of the year. The price of petrol and diesel are pegged to a 15-day rolling average of the international prices of the petrol and diesel.

However, current petrol prices are significantly higher than prices in FY14 when the average price of India’s crude basket was $105.5 per barrel. The price of petrol was decontrolled in 2010 while the price of diesel was decontrolled in 2014.

In June 2013, when India’s average crude basket was at $101 per barrel, petrol was retailing at Rs 63.09 per litre or about Rs 76.6 per litre, when adjusted for the depreciation in the value of the rupee against the US dollar.

Similarly, in October 2018, when the average cost of India’s crude oil basket was at $80.1 per barrel, the price of diesel peaked at Rs 75.7 per litre.

What is the impact of taxes?

Increasing central and state taxes on petrol and diesel are the key reason for the prices of petrol and diesel being at record highs, even though the price of crude oil is only 3.5 per cent higher than at the beginning of 2020, before the Covid-19 pandemic led to a sharp fall in the demand for crude oil.

In Delhi, central and state taxes account for about 57 per cent of pump prices of petrol and about 51.4 per cent of the pump price of diesel. The central government had in 2020 hiked the excise duty on petrol by Rs 13 per litre and on diesel by about Rs 16 per litre to shore up revenues as the pandemic led to a sharp fall in economic activity.

While a number of states including Rajasthan, West Bengal, Assam and Meghalaya have reversed hikes in state levies imposed during the pandemic, the central government has not cut central taxes despite calls from the RBI that taxes on auto fuels should be cut to curb inflation.

Central levies account for 71.8 per cent of total taxes on diesel and 60.1 per cent of total taxes on diesel in the national capital.

Pradhan said on Monday that the government was not currently considering any cuts in taxes on petrol and diesel. “At present, the earning is less. We cannot compromise on the expenditure. The expenditure of health sector has increased,” he said.

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