Fall On Oil Price (Why Indians Will Not Get Any Benefit Of This)

Table of Contents

Why are Oil prices falling ?

Crude oil prices crashed big time because the deal between Saudi Arabia-led the Organization of the Petroleum Exporting Countries OPEC and Russia broke down.
Saudi Arabia started a price war with its oil producing ally Russia.
In short –
Saudi Arabia, the world’s top oil exporter, is trying to destroy the shale oil industry in the US, which isn’t viable at sub-$50 per barrel and create some trouble for the Russian oil industry as well.

India is the world’s third-largest crude consumer.
Last year India imported close to 85% of the oil that it consumes.
Any fall in oil prices is a relief, as the import bill comes down.
Between April 2019 and January 2020, India had imported around 188.4 million tonnes of crude oil and paid $87.7 billion for it.

Crude oil is bought and sold internationally in dollars.
When an Indian company imports oil, it needs to pay for it in dollars.
This pushes the demand for dollar vis-à-vis the rupee.
With oil prices falling, the dollar demand for oil imports is going to come down and this should act in India’s favour at a time when there is tremendous downward pressure on the rupee.
Dollar was worth around ₹58-59 in May 2014. Now it’s worth around ₹73-74

Petrol is sold to dealers in Delhi at ₹32.93 per litre
The central government charges an excise duty of ₹19.98 per litre. This is fixed irrespective of the price of petrol.
Over and above this, a dealer commission of ₹3.55 per litre is to be paid.( Total – ₹56.46 per litre. )
The Delhi government charges a VAT of 27%, which amounts to ₹15.25 per litre.

Final retail price – ₹71.71 per litre ( ₹56.46 + ₹15.25).
Despite crude oil prices having fallen by over 50% over the last six years, the price of petrol in Delhi has continued to remain the same.

Taxes collected by both the central and state governments have gone up, and so has dealer commissions.

State governments are facing a slowdown in tax collections, they are likely to capture some of the fall in prices by increasing the value-added tax (VAT)/sales tax they charge on petrol and diesel.
Property taxes, which are a big source of revenue for many state governments, have taken a beating in the recent past due to a slump in the realty sector.
If lower oil prices persist, the state governments will end up increasing VAT or the sales tax they charge on petrol and diesel, in the months to come.
It is the easiest way for them to increase their tax revenue.

The central government has tended to increase the excise duty on petrol and diesel when oil prices have fallen.
The government had between November 2014 and January 2016 raised excise duty on petrol and diesel on nine occasions to take away gains arising from plummeting global oil prices.

The increase in excise duty will result in annual increase of government revenues by about Rs 39,000 crore.
The gains during the remaining three weeks of the current fiscal would be less than Rs 2,000 crore.