February 26, 2024


Should India move toward permanent dynamic fuel pricing?

Along with inflationary pressures, the Indian consumer has had to deal with rising fuel prices. The price of petrol and diesel at home isn’t decided in a vacuum. Factors like global oil prices, shipping constraints, and changes in excise duty are among those that impact them.

Fuel pricing is not only an economic issue. It often becomes a political one. The government in power invariably gets blamed for high fuel prices affecting the average citizen. What if India moved toward a permanent dynamic fuel pricing mechanism? It’s updated daily based on international oil prices and the rupee-dollar exchange rate. Would this help in any way?


In general, the price of petrol has continued to rise in recent years in India. In many cities, they hover above ₹100 per litre. Diesel prices often go above ₹90 per litre.

So, how is the price calculated? Before 2014, only the government controlled the prices and were revised every 15 days. Then came the deregulation of the prices of petrol and diesel. Oil Marketing Companies (OMCs) like Bharat Petroleum Corporation Ltd and Hindustan Petroleum Corporation Ltd revise the prices daily. This is overseen by the Petroleum Planning and Analysis Cell (PPAC) under the Ministry of Petroleum and Natural Gas.

The PPAC has its set of factors, like crude oil costs, based on international supply and increased demand in the post-lockdown period. There are two other important factors to consider. The first is taxes. Taxes are levied by the state and central governments and keep changing. The second is the rupee to the dollar exchange rate. This is important since over 80% of oil used by India is imported.

The oil market in India has three big players – Indian Oil Corporation Ltd., Bharat Petroleum Ltd., and Hindustan Petroleum Corporation Ltd. They have a combined 90% share of the market.

Here’s how the process goes. Crude oil is first imported and processed. The cost is calculated to include the actual cost of crude, freight charges, import and customs duties. A corporation also levies a ‘Refinery Transfer Price’, the cost of processing crude oil to make a particular fuel. Once it’s ready, OMCs sell to dealers at the “depot price.” This price includes inland freight costs and the margin of the oil corporations.

The final price to the consumer is calculated after adding the Centre’s excise duty, the state’s Value Added Tax (VAT), and the dealer’s commission.

Since the war in Ukraine broke out, India has become one of the world’s top consumers of cheap Russian crude. Additionally, the government cut taxes on the pump prices in 2022, but prices remained above ₹100 per litre.

Aligning India’s fuel prices with the global market is complex. Would it help in the long run?

VIEW: It’s a good approach

While India’s managed price mechanism shields consumers from any immediate impact of international price hikes, it does cause a delay in reflecting global price trends at home. While there’s definitely the advantage of relative stability, it can lead to market inefficiencies and discrepancies between domestic and international prices. The challenge for India is to balance economic stability and closer alignment with global price trends.

An incremental and gradual transition to a market-linked pricing mechanism will allow stakeholders to adopt the new pricing model and minimise disruptions. A transparent formula-based pricing model would lead to greater transparency in the fuel process and launch derivative contracts to help intermediaries better hedge against price risks.

The managed price regime has its merits. However, a permanent dynamic market-driven model would increase efficiency and better global economic alignment. One thing that should happen first is implementing GST on fuel. This would streamline tax structures and lead to more uniform fuel prices across India. The extension of the GST policy to fuel prices is a good first step.

COUNTERVIEW: Too many variables

A daily revision of prices based on international price mechanisms could be concerning to some. Several years ago, when state-run OMCs decided to roll out daily revision of fuel prices nationally, dealers weren’t happy. For consumers, there seems to be little relief. The government’s justification is that retail prices are based on crude prices and OMCs decide the prices.

The opposition has repeatedly flagged that under the Congress-led UPA government, despite elevated prices globally, domestic prices were kept much lower. It’s because fuel prices were only partially decontrolled. Only petrol prices were deregulated in 2010. A daily price change is always a gamble. Pump dealers could be prone to losses if there’s a sudden drop in global oil prices.

Countries that have real-time dynamic pricing have robust infrastructure in place to support such an adjustment. With global price changes comes the need to efficiently distribute fuel. Fuel prices are understandably a delicate issue that no government, be it the centre or state, wants to screw up. Dynamic pricing will most certainly lead to price fluctuations. Unless there’s a strong safety net in place for the vulnerable population to safeguard them, a dynamic pricing model seems risky.

Reference Links:

  • How are fuel prices decided in India? – MintGenie
  • How Is Petrol Price Calculated In India? Factors That Determine Petrol Price – NDTV Profit
  • India’s gas pricing reforms: How it can significantly alter country’s energy basket – Business Today
  • India’s sham fuel pricing regime boosts subsidies – The Economic Times
  • How India can move towards dynamic fuel pricing: A global perspective – Moneycontrol
  • Why Indians are paying a bomb for fuel despite cheap crude prices – India Today
  • Understanding fuel price dynamics in India – Forbes

What is your opinion on this?
(Only subscribers can participate in polls)

a) India should move toward permanent dynamic fuel pricing.

b) India shouldn’t move toward permanent dynamic fuel pricing.


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