Why petrol & diesel cost about ₹100 a litre on average in India?

With the Karnataka government hiking prices of petrol and diesel by ₹3 a litre and ₹3.5 per litre, fuel prices have again made headlines in India. Petrol and diesel prices across India now hover around ₹100 per litre on average, which are all-time high. Despite the pricing of both petrol and diesel being in the periphery of ₹100 a litre, the costs of both fossil fuels vary in different states. These differences in petrol and diesel prices come due to the different range of variable tax components that are applied on these motor fuels. However, the cost level for these fossil fuels is pretty high.

Here is a quick and comprehensive explainer on why petrol and diesel cost about ₹100 a litre.

Crude oil price

The biggest factor influencing petrol and diesel prices in India is the global crude oil price. India imports nearly 85 per cent of its total fossil fuel requirements from overseas countries. Hence, price fluctuations in the international crude oil market directly impact domestic fuel prices. When global crude oil prices rise, petrol and diesel prices in India too follow suit.

Exchange rates between USD and INR

The price of crude oil is denominated in US dollars. The value of the Indian rupee against the US dollar plays a crucial role in determining the end price of fossil fuels in India. A weaker Indian rupee against the US dollar means Indian importers need to pay more rupees for each barrel of imported crude oil, which results in higher petrol and diesel prices at the fuel stations.

Central government's excise duty

The Indian government levies a significant amount of excise duty and other variable taxes on petrol and diesel. While these taxes are a major source of revenue for the government, they also contribute significantly to the final retail price that consumers pay to purchase motor fuels.

VAT by state governments

Different state governments across India levy the Value Added Tax (VAT) or sales tax. The VAT rate is determined after accounting for a few additional elements such as excise duty, which is levied by the central government along with the dealer's fee. The variable rates of the VAT by different state governments contribute to variable retail prices of petrol and diesel in different states and cities across the country.

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