Fuel prices in India - A never-ending pain point

Another analysis of the huge fuel tax rise in India, and its potential impact on inflation.

 Fuel prices in India - A never-ending pain point

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• The story: Over the past few months, repeated price hikes in petrol and diesel rates made life tough for the common man. In October end, prices were increased again taking petrol and diesel prices to record high levels, with diesel nearing Rs 100/litre mark in most cities. The government hasn't responded to calls to cut prices (via tax cuts), and has instead offered reasoning related to UPA-era oil bonds repayment, etc.
• Why is the government doing it: Primarily, the government is facing a fiscal crunch since past few years (post 2017), and especially after the pandemic struck in 2020. It had given a massive cut in corporate income tax rates, in September 2019, leading to a loss of lakhs of crores in taxes. It had to recoup that somehow. Fuel prices was the easiest way out, and these were raised steadily.

1. A sharp increase in global demand as the world economy recovers from the pandemic further led to price of Brent Crude breaching the $85 per barrel mark, its highest level since 2018. The output of the top oil-producing countries is inadequate to meet demand.
2. The OPEC+ cartel has been slow to boost the production of oil. Low crude oil supply from the US also kept the crude oil prices elevated.
3. Elevated tax levels in India make the situation extremely difficult at the pump level.

• Impact of such high prices: The consumer price index (CPI) may breach 6 per cent although "fuel and power" accounts for arund 5.5% of the weightage in  CPI. If CPI inflation goes beyond 6 per cent, it may result in stagflation which is characterized by slow economic growth and relatively high unemployment. The breach in inflation target might force RBI to hike policy rates, which will severely impact the post-pandemic economic recovery. So far, the RBI has restrained itself from doing so, committing itself to "helping the government and staying accommodative". But very high diesel prices will filter down into food inflation eventually.
• How to control fuel prices: The fastest and easiest way out is by slashing the Central and State taxes on fuel. Various bodies (SBI, RBI) in their assessment have recommended it.

1. But tax slashing may increase the demand and consumption of fuel, leading to greater crude oil imports, which could widen the trade deficit. It will also directly affect the revenue of the government.
2. Experts say that bringing petrol and diesel under the maximum GST tax rate of 28 per cent would reduce the petrol and diesel prices to less than Rs.50. But as there will be a huge tax revenue shortfall for the Union, and also the state, many governments such as Tamil Nadu, Punjab, West Bengal, Telangana, Rajasthan, and Kerala opposed this move.
3. By reducing the cess and VAT, prices can be reduced. The Centre can slash the cess up to ₹10 and should ask the States to slash the Value Added Tax up to ₹10 which would increase the sales of fuel thus compensating the revenue loss for States.

• Summary: Fuel prices are a contentious issue in India. Given the general economic despondency and lack of purchasing power post-pandemic, high fuel prices are totally altering household budgets. Relief is expected.
• EXAM QUESTIONS: (1) Explain the dynamics of fuel pricing in India. (2) Explain the logic behind "UPA era fuel bonds responsible for high prices today". (3) Why is fuel not brought under GST? Explain. (4) How is inflation linked with fuel prices? Explain all links.

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