Study on the relationship between international crude oil price, state wise vat rate and retail price of petroleum products in the context of 2015-16 global crude oil price level crash

Abstract

The 2015-16 crude oil price level crash in the international market, although seemed to cause havoc in India, did not significantly impact the dependency of 25 Indian states on the revenue from petroleum products. It happened despite of the fact that in all 30 states of India, irrespective of whether they are heavily dependent or not on the revenue from petroleum products, the average prices of petrol and diesel in the retail outlets, during the crash phase, were more affected by the market, i.e. the average retail prices were primarily linked to the global crude oil price, rather than to the average VAT rates imposed by the state governments. This is because contrary to the common belief, the crude oil price in the international market is passed through to the retail prices of petrol and diesel across almost all the Indian states. But the pass through to the average retail prices, considering all the states, is very small as there is not as much decline in the retail prices of petrol and diesel as the decline in global crude oil price. On an average, states which are heavily dependent on the revenue from petroleum products are more inclined than other states who are not heavily dependent, to increase the VAT rates on petrol and diesel when crude oil price decreases in the international market, as the same happened during 2015-16 when the crude oil price plunged below US$100 per barrel.