The variation of prices of petrol and diesel since June 2002 in the metro cities in India and the impacts of international crude oil prices and exchange rates on such prices in these cities are examined. It is observed that the rates of growth in the prices of petrol and diesel were faster during June 2002 to May 2004 (first National Democratic Alliance regime) as compared to that of crude oil. It increased moderately during June 2004 to May 2014 (United Progressive Alliance regime), despite the international crude oil price reaching a very high level, while the rates of growth of petrol and diesel prices were steady till December 2018. The price of crude oil fell significantly during 2015, although it increased thereafter. But the fall has not been significantly reflected in final petrol and diesel prices. This was because of a significant increase in excise duty and value added tax.
Even after deregulation of pricing, the movement of retail prices of petrol and diesel is not directly related to global crude oil prices. Taxes make up around two thirds of the petrol and diesel prices paid by consumers.
Crude oil price becoming negative is one of the rare events that happened after World War II in the energy sector. The real reason for oil prices to move into sub-zero level is not attributable to supply–demand mismatch, rather it owes to the timing of this movement and specifically what is popularly known as the “day-of-the-week effect.” Though India is importing almost 82% of its oil, falling global crude oil prices are not going to benefit the end users much. But, the interaction effect of the lower crude oil price with COVID-19 is definitely going to have an impact on the country and investors.
This paper undertakes an examination of the differential impact of international oil prices on domestic inflation and output growth in India under two alternative scenarios. One scenario is, when domestic fuel prices are allowed a formula-based automatic alignment with international oil prices and the second, when as per current policy, fuel prices have evolved as a consequence of revisions specified periodically by the government. The differential impact analysis has been undertaken in a structural Vector Autoregressive framework using the technique of innovation accounting.
