Introduction to Diesel Prices in India

Diesel prices in India are updated every day with effect from June 2017. It is called the dynamic pricing method, and the diesel price gets updated daily at 6 AM. The daily price fluctuation allows for the pricing to be in line with the international crude oil prices.

Importance of Diesel in India’s economy

Diesel is a critical fuel in India as it powers vehicles and equipment in a variety of industries. The transportation sector relies heavily on diesel, as several buses, trucks, and trains run on diesel-powered engines. Hence, this fuel is crucial for India’s supply chain and logistics. Apart from that, it is also used in the agricultural sector to power irrigation pumps, tractors and other agricultural equipment.

Diesel is also used in the power generation sector and plays an essential role in helping to meet the ever-growing demand for electricity. The government also used to subsidise diesel, leading to a high demand for fuel. Hence, it has a significant impact on the Indian economy.

In a nutshell, diesel plays a critical role in the country’s economy. However, fuel has a negative impact on the environment. To address that problem, the government aims to develop and use alternative fuel sources and reduce the dependency on diesel.

How are diesel prices determined in India?

A combination of several factors determines the price of diesel in India. They include international crude oil prices, Rupee to Dollar exchange rate, refining and distribution costs, dealer margins and government taxes (excise duty, VAT, etc.). 

The price also varies from one state to another due to the difference in VAT (Value Added Tax) rates. To keep the price in line with the market conditions, the government has brought in the dynamic pricing method. It means the prices are updated every day.

Domestic factors that affect diesel prices in India

Apart from some of the common factors that influence fuel prices across the world, there are certain domestic factors that affect diesel prices in India. In this section, let’s look at those domestic factors.

Subsidies

Previously, the government used to provide subsidies for diesel to keep the prices low. It was done to ensure that certain groups of people, such as farmers and public transportation providers, could afford the fuel. However, in October 2014, the government announced the deregulation of diesel prices in the country. The move came in as a measure to reduce the fiscal deficit and promote market-determined prices.

The end of fuel subsidies in India meant that there would be no financial support from the government to keep diesel prices low. It also means that diesel prices will depend on market conditions. With the introduction of the dynamic pricing method, prices fluctuate daily, depending on various factors that influence the retail price of the fuel.

Excise duty

One of the significant factors that influence the prices of diesel in India is the excise duty. It refers to a tax levied by the Indian government on certain goods, including diesel. The Central Government decides the rate of excise duty, which is applicable across the country. The Ministry of Finance determines the rate of excise duty, which is subject to change depending on the government’s economic policies and budget.

The government adjusts the excise duty on diesel depending on the international crude oil, Rupee to Dollar exchange rates and several other domestic and international factors. Excise duty also raises revenue for the government, which is why it is considered one of the crucial factors influencing diesel’s retail prices in the country.

VAT (Value-Added Tax)

VAT refers to a tax levied by the government on certain goods and services, including diesel. It is a state-level tax set by individual state governments; hence, the VAT rate can vary across the country. The tax generates revenue for state governments and is also a major factor influencing diesel’s retail prices in India.

VAT is calculated as a percentage of the base price of diesel, including the central excise duty. The rate of VAT varies from one state to another. For instance, the VAT rate in some states can be higher, resulting in higher retail prices. In some states, the VAT rate can be lower, leading to lower retail prices. Similar to excise duty, the rate of VAT on diesel is subject to the state government's economic policies and budget. It also depends on the market conditions and fluctuation of international crude oil prices.

Market dynamics

The market conditions hugely influence the prices of diesel in India. In other words, supply and demand also play a role in determining the retail price across the country. For instance, if the demand for diesel is high, it may lead to an increase in prices. In contrast, if the supply is in excess and the demand is low, the prices are likely to drop.

Competition among fuel retailers can also influence the price of diesel in India. For instance, retailers may compete by offering lower prices to attract customers. It may lead to a decrease in the prices in a given area. However, such competition is also affected by other factors, such as crude oil prices, government policies and taxes.

International factors that affect diesel prices in India

In addition to domestic factors, wide-ranging international factors influence the prices of diesel in India. This section throws light on those factors.

Global oil prices

Crude oil prices in the international market are a primary factor affecting the country's diesel prices. Crude oil prices depend on various factors such as supply and demand, production cuts, geopolitical events, natural disasters, currency rate fluctuations and economic conditions. The impact of international crude oil prices on diesel prices in India is straightforward. If the crude oil prices go up, the cost of oil imports will also go up. Hence, the retail price of diesel in India will increase. Similarly, if the crude oil prices decrease, the importing costs will also reduce, Leading to a decrease in the retail price of diesel in India.

Currency exchange rates

Currency exchange rates are an important factor that determines the price of diesel in India. The international trade of oil happens in Dollars. Hence, Rupee to Dollar exchange rate dictates the importing costs. If the Rupee appreciates against the Dollar, the oil importing costs will decrease. On the contrary, if the Rupee depreciates against the Dollar, the import costs will go up. The fluctuations in import costs have a domino effect on the retail prices of diesel in India. The exchange rate volatility can also influence the prices of diesel in the country. For instance, if the Rupee to Dollar exchange rate is highly volatile and fluctuates frequently, it can also lead to frequent fluctuation in diesel prices. Overall, currency exchange rates can significantly impact diesel’s retail prices in India.

Trade policies

International trade policies can have a significant impact on diesel prices in India. The following points will give a more detailed picture of the importance of trade policies in determining the retail price of diesel.

• If the Indian government increases the import tariffs, the oil import costs will rise. Similarly, if the import tariff is reduced, the importing costs will decrease. In turn, it leads to diesel price fluctuations.

• India’s international trade agreements with other countries can also influence the diesel prices in the country.

• Embargoes imposed by oil-producing countries can have an adverse effect on diesel prices. For instance, if a country imposes an embargo on diesel exports to India, the likelihood of an increase in diesel prices in India is high.

• Trade disputes with oil-exporting countries can have a negative impact on diesel prices in India. Disputes related to tariffs, quotas, embargoes and economic sanctions can directly affect diesel’s retail price in the country.

Impact of diesel prices on the Indian economy

Diesel as a fuel plays a critical role in India’s economy, as the transport, manufacturing and agricultural sector rely heavily on this fuel. This section will give you an insight into the impact of diesel prices on the country’s economy.

Effect on transportation and logistics

Several vehicles used for transport and logistics, including trucks, buses, trains and ships, run on diesel. Hence, any fluctuations in diesel prices will directly affect the transportation and logistics sector. High fuel prices can increase transportation costs and make transportation and distribution of goods more expensive. 

High diesel prices will also impact the logistics, e-commerce and trucking industry that rely heavily on diesel. The result of this impact will be an increased cost of goods and services across different sectors. Transportation is a vital pillar of a nation’s economy, and the rising diesel prices can have significant repercussions.

Influence on agricultural sector

Diesel is a widely used fuel in the agricultural sector. It is used to power irrigation pumps and farm machinery such as tractors. The increase in diesel prices can increase the cost of irrigating crops and may lead to lower crop yields. Apart from that, high retail prices of diesel can also make transportation of agricultural products and goods more expensive. In turn, it can lead to lower profit margins for farmers.

High diesel prices can also increase the input costs in the agricultural sector. For instance, the cost of fertilisers, pesticides and seeds will go up due to the increased transportation costs. It can significantly affect the profitability of farming and have a negative impact on the overall agricultural sector. Apart from that, it can adversely affect rural development as most farmers belong to the country's rural regions.

Impact on inflation

Diesel prices in India can significantly impact inflation as the fuel is widely used across different industries. Hence, it can increase the cost of production/distribution of goods and services. All these factors can lead to increased costs for industries, businesses and consumers, which can contribute to inflation.

The implications of high diesel prices can be significant enough to impact inflation substantially. It’s due to the fact that the rise in diesel prices will lead to an increase in transportation, logistics, agricultural and production costs. And at the end of the funnel, the consumer will feel the pinch of it, leading to inflation.

Future outlook for diesel prices in India

Predicting the future outlook for diesel prices in India is difficult as it is subject to wide-ranging factors. The factors include international crude oil prices, Rupee to Dollar exchange rates, government policies, taxes, economic conditions and supply and demand. The shift towards cleaner energy resources can also influence the future of diesel prices in India. But for now, predicting the magnitude and direction of diesel prices in the country is not possible as it depends on various factors.

Do diesel prices impact motor insurance?

Diesel prices in India can indirectly impact the motor insurance sector. With the rising prices of diesel, production and transportation costs will also go up. In turn, it can increase the retail cost of diesel-engine-powered vehicles. The more expensive the vehicles, the higher the insurance premiums. It can also have a negative impact on the motor insurance sector as the demand for diesel vehicles may reduce owing to the high cost.

Motor insurance is necessary if you own a vehicle, irrespective of the fuel type and fuel prices. Hence, it would be beneficial to opt for an insurance plan that offers comprehensive coverage for your vehicle. In case you are looking to insure your diesel vehicle, you can check our wide range of car and bike insurance plans.