Fuel Price Hike

Series: #TonightsFinNews

Post No.: 1

Topic: Fuel Price Rise

The latest hike in Petrol and Diesel prices in India was witnessed on 27th June; this is 31st hike in prices since May 4, the petrol price is highest in Bhopal at Rs 106.71 per litre, while diesel costs Rs 97.63. As many as 11 states and union territories have breached the Century mark in prices of petrol. The average price of gasoline around the world is 1.17 U.S. Dollar per liter, while that of India is 1.33. In this post we will deep dive into its causes, impacts and possible solutions. Let’s get going.

CAUSES

1. Increasing International Oil Prices: India imports 82% of required crude oil consumption and with demand for fuel increasing after the economies returning from the Covid led restrictions, Brent(the Benchmark for oil prices in India) has seen an gradual surge. However not just the demand but also supply is impacting the global prices as OPEC countries did production cuts in the month April although from the month of May they are cautiously adding back supply. Still Brent crude oil prices are hovering around $75 a barrel creating a major distress for consumer countries like ours.

2. Phenomenally High Tax Rates: It’s not just a factor of soaring prices but a major part of the price is taxes. Seven years ago, crude oil price constituted two-thirds of the fuel price, now taxes and other levies occupy this place.

The base price of petrol has only reduced – from Rs 47.12 in May 2014 to Rs 37.29 in June 2021 and central taxes increased from Rs 10.39 in May 2014 to Rs 32.9 in June 2021. In 2014-’15, the central excise duty collected was Rs 29,279 crore on petrol and Rs 42,881 crore on diesel. Between April 2020 and January 2021, Rs 89,575 crore had been collected as excise duty on petrol and Rs 2,04,906 on diesel. This is more than a 400% increase.

Now not only Centre but States levy VAT as well. The sales tax (VAT) imposed by state governments differs from state to state. The central government charges 34% as Excise Duty and the Delhi state government charges 23% totalling to 57% as the tax on the retail price of one litre of petrol (the latest exact % may vary a bit).

IMPACTS

The points in this section are brief but self-explanatory

1.Immediate effects:

a) Rise in monthly budget of fuel leading to reduced household savings

b) Adverse impact on already struggling automotive and ancillary sector which is also a large source of employment in the country

2. Cascading Effect:

a) Companies engaged in the logistics and transportation of goods are expected to increase their service rates soon

b) Consumer oriented companies in tough spot as product delivery rate surge

c) This will eventually lead to a rise in headline inflation, which we are already witnessing

SOLUTIONS

1. Short Term Solutions

a) Decrease in tax rates on fuel and increase of tax rates on Tabaco: Reducing tax rates is not easy as government also need funds to meet its ever growing demand of raising the expenditure on welfare schemes. The supposedly free vaccination drive is not free it comes at a cost, better that this cost is levied on the products that hit only the direct consumers and not entire economy. India is far below other nations in terms of Tabaco tax burden. WHO recommends total taxes to represent at least 75% of the retail price of all tobacco products. Currently total tax burden (as % of final retail price) is 49% for cigarettes, 63.7% for smokeless tobacco, bidis on the other hand have low tax burden of only 22%.

2. Long Term Solutions

a) Adding capacities in Strategic Petroleum Reserve(SPR): India has SPR storage capacity of just 39 Million Barrel (MB) while our per day requirement is 4.2 MB which means we can only stack 9-10 days of consumption need. We, meanwhile, have storage capacity nowhere near other Asian countries such as China (550 MB), Japan (528 MB) and South Korea (214 MB), these capacities can help us at times when the prices of crude dip as they happened last year.

b) Faster penetration of EVs: India could save on crude oil imports worth over INR 1 lakh crore (USD 14 billion) annually if electric vehicles (EVs) were to generate 30 per cent share of India’s new vehicle sales by 2030. However currently EV market penetration is only 1% of India’s total vehicle sales.

c) Bringing petroleum products under the ambit of GST: GST will help reduce the taxes on petroleum products but this remains a dream as it is easier said than done, governments both state and centre are in no position to bear the revenue loses that this decision will have. Fun Fact: The Kerala High Court has asked the Goods and Services Tax (GST) Council to consider a representation that seeks to bring petrol and diesel under the GST regime, and take an appropriate decision in six weeks, this will be interesting to follow up.

Lets discuss it more in the comment section.

Few sources are given below in the comment section. For more please reach out.

Also if you are reading this then please show some support and encourage me by hitting that like button, comment the topic you would want me to cover next.