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Effect of high rated fuel on country’s economy

High fuel taxes combined with a recovery in international crude oil rates has affected millions of people, slowing down the recovery of the country. The price of petrol and diesel hits a new record everyday. In Mumbai, petrol can be bought at Rs 109.98 per litre and diesel costs Rs 94.14 for one litre as […]

High fuel taxes combined with a recovery in international crude oil rates has affected millions of people, slowing down the recovery of the country. The price of petrol and diesel hits a new record everyday. In Mumbai, petrol can be bought at Rs 109.98 per litre and diesel costs Rs 94.14 for one litre as on 18th January.

Experts have warned that rising fuel rates could severely derail India’s economy, which is already under pressure due to the impact of the second Covid-19 wave. High petrol and diesel prices have not only impacted vehicle owners, but also people who do not own a car. Rising fuel prices have resulted in a sharp rise in retail inflation, making a host of essential commodities and services costlier for citizens.

Elevated tax levels are playing a major role in the current record high prices in India. The central government had last year increased levies on petrol by Rs 14 per litre and on diesel by Rs 16 per litre to shore up revenues as the pandemic forced a sharp slowdown in the economic activity. Central and state taxes currently account for about 53.5 per cent of the pump price of petrol and about 47.6 per cent of the pump price of diesel in Mumbai

The rising crude oil prices, and the higher taxation impact, have also contributed to the prices of petrol and diesel regularly setting new record highs across the country in 2021. Petrol in nation’s capital is priced at Rs 95.41 per litre while diesel in the national capital is retailing at Rs 86.67 per litre. India has seen a faster recovery in the consumption of petrol than of diesel after pandemic-related restrictions with petrol consumption up 9 per cent in September compared to the year ago period but diesel consumption remaining 6.5 per cent below 2020 levels. Diesel accounts for about 38 per cent of petroleum product consumption in India and is a key fuel used in industry and agriculture.

India has long pushed for Middle eastern countries to remove the Asian premium that Asian countries have to pay for crude oil as key oil producers set higher prices for India than for the US and European countries. Despite a 40 cent per barrel cut in the official selling price of light crude to Asia, Saudi Arabia is still charging a $1.30 premium on the benchmark price for light crude sold to India compared to a $2.4 discount on the benchmark price for European customers.

Experts have noted that countries like India do not have much bargaining power in the current market scenario where supply is lower than demand and that India’s bargaining power may be reduced further if we try to further diversify crude oil procurement. Also, the level of output and pricing benchmarks are decided by cartels such as OPEC.

So, Experts believe that the government should cut excise duty to some extent as it will provide some relief to customers and lead to higher sales and revenues which will accelerate the economy. But economic recovery will become tricky if the government continues to ignore rising fuel prices. If the commodity becomes too expensive, it would see a sharp decline in revenue.

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