Are the Prices of Petrol and Diesel Determined by the Market Forces In India?

The Indian government has supposedly deregulated the determination of prices of petroleum products like petrol and diesel in India. Every time prices of these two products go up, the government plays this card of deregulation to answer the critiques e.g., recently the Modi government reduced the excise duty on petrol and diesel by 1.5 rupees to lower the daily rising prices of these two products in the shadow of coming 2019 assembly election, and when the share prices of oil companies started declining in the aftermath of this move, the ministers are now reassuring the market participants that the government would not go back to regulating fuel prices.

How much truth is there in this claim of successive governments that the prices of petrol and diesel are deregulated in India and that they are determined by the market forces of demand and supply? To understand this we need to understand how market determines prices of various economic goods.

A market is an organic system, a process, where individual buyers and sellers come together and voluntarily exchange their respective private properties i.e., economic goods like onion, potato, wheat, corn etc. etc. This process is, as I emphasized above, purely voluntary in nature. And, voluntary means there is no involvement of government whatsoever.  When they exchange two economic goods, the price comes into existence. Price is nothing but an exchange ratio of the two goods that are exchanging e.g., if Robinson exchanges his two fish for one coconut of Friday then the price of 1 fish is half coconut and 1 coconut 2 fish. When we enter into the indirect exchange money economy, the one common good exchanging in every transaction is the money good. Money is nothing but a generally accepted medium of exchange; historically precious metals like Gold and Silver have been used by humans as the money good. In this money economy the price of every commodity is expressed in money terms e.g., if Robinson exchanges his two coconuts for 10 rupees of Friday then the price of one coconut is 5 rupees.

As we have seen above, the market process in which price is determined is a purely voluntary process involving no government interference. Whatever two exchanging parties voluntarily exchange with each other becomes the price.

Graph 1: International Crude Oil Price (Source: www.oilprice.com)

Once we understand what market price is, we are now in a position to examine the claim of the government that the prices of petrol and diesel are determined by this purely voluntary market process, and that government has no role in its determination.

Firstly, the recent reduction of prices of petrol and diesel by central and state governments itself contradicts this claim. If prices of petrol and diesel are determined by the market then how can government lower it? They can lower it only because these prices are not an outcome of a voluntary market process. Government has imposed a very heavy tax, called excise duty, on the prices of petrol and diesel since time immemorial. By reducing this tax governments are able to lower the prices of petrol and diesel. This shows that the government hasn’t deregulated the prices of petrol and diesel. They are very much regulating these prices by using the tool of taxation. The real market determined price is the one where no taxes or duties are involved. If we remove this excise duty and VAT etc., taxes then the prices of petrol and diesel will come down substantially. During last two years and more the international price of crude oil remained low (see graph 1), but the Indian consumers didn’t see any dip in the prices of petrol and diesel. In fact, the prices only went up. This is because the Modi government imposed a very heavy excise duty on these products. They pocketed billions of rupees in the form of excise duty and VAT. Indian consumers were thus robbed of this benefit of lower international crude oil price. All these facts tell us only on thing that the prices of petrol and diesel in India are in no way deregulated. The government remains fully in control of these prices.

Secondly, the international price of crude oil itself is not a product of free market forces of demand and supply. The oil market is dominated by government cartel called OPEC (Organization of Petroleum Exporting Countries). This oil cartel has a firm control over the supply of oil in the world, and by regulating this supply they fix the price of oil in the international market.

All in all, the claim of Modi government ministers that the prices of petrol and diesel will not be regulated again is a blatant lie. These prices were never freed of government controls. They were under its firm regulation from the get go. The whole idea that these prices are determined by the free market forces of demand and supply remains a pure myth and a government propaganda.