In order to ease that frustration kinda burden on citizens, while at the same time working toward stabilizing our country’s fuel system, the Indian government will now reduce excise duties on both petrol and diesel by ₹10 per litre (₹3 and ₹0 respectively). 

Alexa, insert Robert Downey Jr.’s sticker saying “Haaaash.” 

This was announced after an emergency meeting last night chaired by PM Narendra Modi, and has been developed in response to ongoing instability on the international oil markets because of recent tensions in the Middle East.

There has been reporting in The Times of India, NDTV, and The Hindu on how this move seems consumer-friendly. However, the primary goal of this step is not necessarily to provide immediate relief at the pump by lowering prices; its primary goal is to stabilize the existing fuel supply (the fuel ecosystem) in this country. 

Govt Cuts Excise Duty on Petrol and Diesel by ₹10 Per Litre

The government has specifically lowered some excise duties and thus will now calculate an effective excise tax rate of ₹11.9 for petrol, down from ₹21.9, and ₹7.8 for diesel, down from ₹17.8.

Yaya! good news or what? 

Both products will continue to have multiple tax components (e.g. Basic Excise Duty, Agriculture Infrastructure Cess, Road and Infrastructure Cess) as part of their respective excise duties. Diesel will receive more extensive structural relief as it has completely removed the Special Additional Excise Duty.

Why Global Crude Oil Prices Triggered India’s Fuel Duty Cut

The current energy crisis, which continues to deteriorate quickly, has certainly been exacerbated by heightened anxieties in the Middle East, the war between the US, Israel, and Iran, and issues surrounding the Strait of Hormuz (where much of the world’s oil supply lines travel through) and have reached more than US$108 per barrel on occasion. 

The Strait of Hormuz is without any hiding the MAIN CHARACTER in this dilemma, with an estimated 25% of total surrogated crude shipments moving through this narrow waterway and approximately 40-50% of all crude oil imported into India using the Strait of Hormuz as a shipping route. Thus, any disruption of this waterway will cause consumers to bear a much higher total price for imported oil.

Govt Chooses to Absorb Revenue Hit to Protect Consumers

According to Union Minister of Petroleum, Hardeep Singh Puri, rather than passing along the costs of increased fuel prices to consumers, his government has decided to accept the financial responsibility of increased fuel prices. 

The Modi Government had only two alternatives; dramatically increase prices on its citizens’ fuel or take the brunt of the financial impact so that Indian families would not bear the brunt of the volatility seen on an international level.

“Government has taken a huge hit on its taxation revenues to ensure very high losses of oil companies (approximately ₹24/litre for petrol and ₹30/litre for diesel)… are reduced,” he said. 

“This will provide protection to consumers from rising prices… ensuring both affordability and availability of fuel across the country,” Finance Minister Nirmala Sitharaman stated. 

Why You Might Not See A Decrease In The Price Of Petrol Anytime Soon? 

Before your glee reaches the sky to accompany the former rates of petrol and diesel, here’s some news. 

A ₹10 decrease in the retail price of petrol that you are currently paying does not directly translate to a decrease in the retail price of petrol. The reason that you will not see a decrease in prices at this time is due to the current financial status of the oil marketing companies (OMC).

According to The Hindu, the OMC’s will be continuing to sell fuel at its current retail price and will, however, now be liable to pay a lower amount of tax on the amounts received from the sale of the fuel to companies.

Public sector OMC’s have been incurring their steep losses. Why? Due to the increasing price of crude oil. Effectively the duty cut has transferred a considerable amount of the OMC’s losses to the consumer, not essentially benefitting consumers at the pumps.

Private Fuel Players Raise Prices Amid Global Oil Pressure

While the public sector companies have held steady with regard to pricing, private players have started to react

Nayara Energy had an increase of:

•5 rupees for petrol

•3 rupees for diesel

The reason for that increase was due to the extraordinary challenges being experienced by the industry overall that impact all aspects of the supply/availability chain. This illustrates the difference between the system set up by the government and those that are affected by prices set with the basis of market forces.

Export Duty on Diesel and ATF Introduced to Secure Domestic Supply

In addition to cutting the excise tax, the government, through an export duty on fuel, is now working to ensure sufficient fuel is available in the domestic market.

•Diesel = 21.5 Rupees

•Aviation Turbine Fuel (ATF) = 29.5 Rupees

In regard to this, Finance Minister Nirmala Sitharaman stated:

“This will ensure adequate availability of these products for domestic consumption.”

The measures will discourage excessive exporting and focus on supplying for domestic use given the severe shortages of fuel worldwide.

Political Reactions to Fuel Duty Cut: Govt vs Opposition

There are mixed political reactions from politicians regarding this measure (surprise surprise?) 

Politicians that support the government are viewing this as a timely intervention. For example, Union Minister Dharmendra Pradhan called it:

“A timely step taken in the public interest during a challenging global situation.”

Commerce Minister Piyush Goyal added that the cut, 

“translates into direct relief of ₹10 per litre… and will help stabilise domestic supply.”

On the other hand, opposition party members have questioned whether these measures will make any difference. RJD MP Misa Bharti raised concerns about whether or not fuel will be available; and members of the Congress Party expressed how although they are cutting the excise taxes, consumers will still be greatly taxed so the consumer will not be benefiting.

The reduction of the excise tax is intended to accomplish the following:

•Partially absorb the impact of global fuel prices

•Provide assistance to oil marketing companies

•Prevent significant increases of domestic retail fuel prices.

Ultimately, the consumer’s benefit for these reductions will be dependent upon forthcoming actions relative to crude oil price levels in the global commodity markets and what actions oil marketing companies will take in passing on these benefits to consumers.