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Fuel price hike, the easiest path to revenue recovery

Shivam Pathak

Since Corona virus has hit the economy substantially, to overcome the situation, state governments have increased the duties on petrol and diesel

As the lockdown gets lifted, people have started travelling due to job, studies or certain reasons. The ones who must move out are increasingly switching to personal vehicles to maintain social distancing. At a time when prices are as high as that of October of 2018, we are under the impact of sky-rocketing fuel price more than ever before.

Rising global crude oil prices and an improved demand outlook for petroleum products due to the prospects of a viable vaccine for Covid-19 has a major impact on the recent rise in the prices of petrol and diesel, according to experts.

What are the core reasons behind the increasing oil prices?

India imports 84% of its domestic demands of crude oil, which is why the price fluctuates in tandem with global demand. The impact of COVID 19 on the economy and decreased fuel demand initially led to a fall in global oil prices. Now with the market recovering, prices are slowly showing an upward trend. The prospects of developing a Covid-19 vaccine are also a key reason for economic optimism.

Since Corona virus has hit the economy substantially, to overcome the situation, state governments have increased the duties on petrol and diesel. In fact, taxes constitute 69% of the total price of petrol that we as consumers pay. For example, excise duty on petrol increased to Rs. 32.9 from Rs. 19.98 between Jan-Dec 2020.

Source: Indian Oil Corporation, 2020 price

From the standpoint of pure economics, exchange rate has a profound impact on the amount of oil India can purchase in the international market. This implies we are able to purchase less oil with the same amount as we did earlier. Inversely, the government needs more money, to import the same quantum of oil.

Presently the price of petrol and diesel in the National Capital is ₹ 85.70 per litre, and ₹ 75.88 per litre respectively. While in Mumbai, petrol and diesel rates are even more at ₹ 92.28 per litre and ₹ 82.66 per litre respectively.

The rise in fuel price is due to increase in taxation by the centre and the state, to make up for loss of revenue during the lockdown. Excise duty by centre and VAT by state govt escalates prices. The tax collected is used by the central government to balance the fiscal situation. At 69%, India is one of the most highly fuel-taxed countries in the world, with Italy following at 64%, and USA at a minimal 19%.

Rajya Sabha member and noted economist, Subramaniam Swami expressed his apprehension on the rising fuel prices, “Petrol price at Rs. 92 per litre is a monumental exploitation by GoI of the people of India. The price ex-refinery of petrol is Rs. 30/litre. All kinds of taxes and Petrol pump commission add up the remainder Rs.60. In my view petrol must sell at max. Rs. 40 per litre.”

At this stage it is relevant to note, that the petrol price is largely driven by international agencies which control demand and supply. On the international front, for example, OPEC (Organization of the Petroleum Exporting), countries decided to cut down oil production by 10 million barrels a day, hoping to boost energy prices.

Since 2014, the revenues collected by the Centre from the sales of petrol and oil products have nearly doubled

Impact on common man:

Increase in petrol prices will impact the cost of production and manufacturing on energy input industries. Given that almost every industry is driven by energy, the cost of which ultimately boils down to the consumer. This will have a negative impact on the scale of production and may prove counterproductive if the prices increase further, leading to a collapse in demand.

Usually, when fuel prices go up, we see an inflationary impact and depreciating exchange rate. This will impact anyone owning a business which involved foreign currency. An industry insider who wishes to remain anonymous has noted: “Diesel has a secondary effect. Since all the trucks run on diesel, it will increase the freight cost, which in turn finds its way to increasing price of food grains, goods and other products.”

The rising cost of diesel will thus hurt the common man. Most of the public transport systems run on diesel in most cities. The bus ride cost will go up. Over and above, India is at a retail inflationary high of 7.6%. The increasing gap between job losses and rising prices can be deadly for the economy and the economy.

The price rise may lead to some hardship on the part of the consumer. However, taxation is an important part of welfare state, and the impact of a higher tax will be seen in the long run.

 

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