Petrol & Diesel Prices in India, Pricing Mechanism Trade Parity Price TPP YouTube Lecture Handouts

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Petrol & Diesel Prices in India

Pricing Mechanism Trade Parity Price TPP

  • First, the pricing mechanism. The price of petrol and diesel in India is not determined by the actual costs incurred by PSU refiners such as Indian Oil, HPCL, and BPCL on crude oil sourcing, refining and marketing. Rather, a formula — trade parity price (TPP) — is used to price these products.
  • It assumes that 80 per cent of petrol and diesel is imported into India and 20 per cent is exported. Therefore, petrol and diesel prices in India are determined based on prices of these fuels in the international market — and not based on crude oil prices. Now, while international petrol and diesel prices generally move in line with crude oil prices, it need not always be the case, given that demand and supply dynamics could be different.

What՚S Added Further

What՚S Added Further
Base Price29.34
Transport0.37
Dealer Cost29.71
Excise Duty32.98
Commission3.69
VAT19.92
Total Cost86.30
  • The TPP in dollars is converted to rupees. Then come other costs and margins of the oil companies, dealer commission, and taxes.
  • Price in table explains price in Delhi on 1st Feb 2021
  • Central excise duty makes up for 39 per cent of petrol and 42.5 per cent of diesel Central excise duty makes up for 39 per cent of petrol and 42.5 per cent of diesel … But it raised excise duty by ₹ 2 per litre in July 2019. It again raised excise duty on March 2020, by ₹ 3 per litre each.
  • The government has proposed farm cess of ₹ 2.5/litre on petrol, ₹ 4 on diesel. There, however, will be no additional burden on the consumer. The Centre has proposed an agricultural infrastructure and development cess of ₹ 2.5 per litre on petrol and ₹ 4 per litre on diesel in the Union Budget 2021

Daily Pricing Mechanism

  • From mid-June 2017, the pricing of petrol and diesel is done through a ‘daily pricing’ mechanism, based on a 15-day rolling average international rate. Therefore, time lag has an effect too. The weakening of the rupee against the dollar over the years has added to the fuel՚s cost.
  • Earlier petrol prices were revised every fortnight, meaning that unlike now, the prices changed on the 1st and 16th of every month. However, on June 16,2017, a new scheme was implemented under which prices were to be revised every morning at 6 am. This shift from administrative price mechanism (APM) to dynamic pricing was done to ensure that the benefit of the smallest change in international oil prices can be put into effect by dealers
  • Before dynamic pricing was implemented, private companies protested government-controlled pricing saying that it reduced their profitability. It also affected competition, leaving consumers with little choice.

What Can Help Customer?

  • India imports most of its oil needs but is more than self-sufficient in petrol and diesel production. Therefore, the trade parity pricing mechanism has often been criticized, especially since petrol and diesel are ‘decontrolled’ fuels. The complaints include allegations of cartelization with the three PSU oil companies charging nearly the same price, despite different cost structures and efficiencies.
  • Transparent pricing, based on market principles, will likely help consumers more.

Impacts of Price Rise

Higher petrol and diesel prices don՚t just mean higher personal transport costs. They could also cause a price spike in a host of goods and services, given that these fuels play a big part in running the economy՚s wheels. Inflation has already reared its head again.

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