Current Affairs

Reasons for Oil Price Hikes in India

Oil price hike

Due to increasing prices of oil in India, some people are curious about the reason behind it and some are blaming the Indian government for the same, without even knowing about the reason behind it. All of you are only looking at the prices on the India level but if you will see it in the international level, you will see it with the different perspective and you will get your answers automatically. You just have to analyze the international market’s crude and petrol prices, you will know that why it is so as international product prices influence the domestic prices.

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The reason behind the price increase

In India, petrol and diesel retail prices follow global prices of these auto fuels, not the crude one, even though the crude oil price trends are very much associated to them. Since the supply cut has been initiated by the Organization of the Petroleum Exporting Countries (OPEC) and Russia, there has been an increase in global oil price (not just only India). This year, there has been an increase in the cost of the Indian basket of crude to $63.80 (average price) in March 2018, from $47.56 a barrel in 2016-2017 as per the data of Petroleum Planning and Analysis Cell (PPAC). Average of Brent crude, Oman and Dubai are been represented in the Indian basket.

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There are other geopolitical expansions which is impossible to be ignored and which became the main cause which will result in the rise in crude and products prices globally which are now moving past people’s expectation. While everyone is busy worrying about the crude prices, domestic retail prices of India are ruled by the international product prices, that’s the reason behind frequently rising prices which use to take place nowadays.

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Cause for concern

Day by day increase in energy needs of India which is fulfilled by imports has been caused by the tension over prices of crude oil. 214 million tonnes of crude oil has been imported in India in 2016-17. In July 2009, Crude oil price had also reached to a record of $147 per barrel because of its ultimate volatility. Other cause of concern includes VAT rates which get impacted by the excise duty rates consequently. The significance of revenue from the VAT on diesel and petrol for States’ budgets is also notable. VAT rates differ from state to state. The highest VAT rate on petrol of around 40% is imposed by Madhya Pradesh. Most states charge a lower VAT on diesel and have equal rates, such as Odisha and Gujarat and a higher rate on diesel is charged in Goa. Under goods and services tax (GST) regime, the state’s resistance to bringing petroleum products lies. The maximum 28% GST rate of which the states’ share will be around 14% can even lead to an extreme fall in the revenue from the VAT on petrol and diesel presently. The share of 14% on a Rs 40 / litre price means that the state will collect up to Rs 6 /litre. Although nowadays the state collects diesel of Rs 10 / litre and petrol of Rs 15 / litre which makes it hard to come at a reasonable GST rate which preserves revenue of State. That’s the reason behind GST being excluded from petrol and diesel.

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How does it affect the Indian economy?

Oil import bill and trade deficit of India are getting affected by the constant increase of the crude oil price in the global market. In 2015-16, the gross domestic product (GDP) of India has been boosted because of the improvement of India’s trade which was happened after the oil prices decreased.

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The oil price outlook

Crude oil is accounted for up to 90% of the production cost of auto fuel and with that experts have believed that the global oil price will stay stable. OPEC is looking to increase its partnership with Russia on production cuts. You should know that OPEC has the responsibility to produce around 40% of crude oil globally and our country is one of the OPEC’s customer. Analysts have said that in the phase of trade war escalation, there could be slow down of economic growth globally and the conclusion of it will be low commodity prices, containing that of oil.

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Strategy of India

With the growth of energy demand, India has been pursuing suitable rates. New Delhi is also working freshly on setting the new strategies of import by increasing the short-term contracts share in the case of convenient market trends and by exploring the deals of long-term supply at deducted prices. The fresh architecture of energy also includes obtaining hydrocarbon assets widely and expanding the sources of India’s supply from geographies which is the United States and connecting renewable energy sources to its energy mix in order to gear the probability of price shocks.

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