How are Petrol and Diesel Prices Determined in India?
Petrol and diesel prices in India are not centrally controlled. State-owned Oil Marketing Companies (OMCs) like Indian Oil Corporation (IOC), Hindustan Petroleum Corporation (HPCL), and Bharat Petroleum Corporation (BPCL) have the freedom to fix their own prices without any intervention from the central government.
While the state-owned OMCs have the autonomy to set their prices, both the central government and individual states impose taxes on these commodities. The central government imposes excise duty, which varies between Rs 20-22 per liter for different types of petrol. State governments impose VAT (Value Added Tax), which ranges from 40-35% on petrol and 20-15% on diesel. Unfortunately, excise duty and VAT on petrol and diesel are not brought under the Goods and Services Tax (GST), which is a comprehensive, multi-stage, destination-based tax that is levied on goods and services at every stage of the supply chain, with a credit of inputs taxed at each stage.
How Petrol and Diesel Prices are Set
Starting from June 26, 2010, for petrol and October 19, 2014, for diesel, the state-owned OMCs have been determining the prices based on market conditions. These prices are adjusted in line with the fluctuations in international market prices and other market conditions. The OMCs not only increase but also decrease the rates as required. The price determination is a dynamic process, reflecting the prevailing market demand and supply conditions.
Why Free Market Pricing?
Allowing the market to determine the prices of petrol and diesel has several advantages. Firstly, it allows for a more efficient allocation of resources, as the prices signal to producers and consumers the value and scarcity of these commodities. Secondly, it eliminates the need for complex and often inefficient price controls, which can lead to distortions and inefficiencies.
Controlled prices can sometimes lead to increased corruption in the distribution system. When prices are fixed, there is often an incentive to redistribute these commodities, leading to black markets and other forms of corruption. Free market principles, on the other hand, eliminate these opportunities, promoting transparency and integrity in the market.
Subsidies for Domestic LPG and Kerosene
For subsidized domestic Liquefied Petroleum Gas (LPG) up to 12 cylinders per year and PDS (Public Distribution System) kerosene, the government continues to regulate the prices to protect the common man from the fluctuations in international oil prices and domestic inflation. These subsidies ensure that these essential commodities remain affordable for the majority of the population.
On the other hand, the prices of non-subsidized LPG are determined by the OMCs in line with international market conditions. This approach ensures that consumers are aware of the true cost of these products and can plan their consumption accordingly. While the prices may be higher, consumers are aware of the factors that influence them.
Conclusion
In conclusion, the ability of state-owned OMCs to set their own prices for petrol and diesel has led to a more efficient and transparent market. This system not only eliminates the need for complex price controls but also reduces the opportunity for corruption in the distribution system. The government's support for essential subsidized commodities ensures that the most vulnerable sections of the population continue to benefit from these important services.