Rising Prices, Mounting Worries

Such levies funded the government schemes to provide free COVID-19 vaccines, meals, and cooking gas to millions amid the pandemic
Rising Prices, Mounting Worries
Representational ImageSource: Pixabay

Rising fuel prices is not a new phenomenon. It has been a major concern for even in pre-Covid times. In 2018, India occupied the number one spot by selling fuel to its citizens at exorbitant rates, when the fuel rates were down in the international market.

Surprisingly, the fall in crude oil prices at that time in the international market was capitalised by the government (both central and state governments) to levy heavy taxes on the fuel. In 2014, the central and the state taxes were a little above 47% of the dealer price of petrol.

In 2018, it went up to more than 100%. In case of diesel, it went up to over 70% from around 25% reported in May 2014. While the average price of the Indian basket of crude oil was $106.85 per barrel in May 2014, it had fallen to as low as $28.08 per barrel in January 2016. In March 2018, the average price of the Indian basket of crude oil was $63.80 per barrel, 40% lower than May 2014.

With the outbreak of Covid-19 pandemic, when massive economic lockdowns put a break on the consumption of the fuel, there was no cut in prices. It was a first in history when oil prices went into negative territory on April 20, 2020. On that day, when the US benchmark West Texas Intermediate (WTI) fell soon after the market opened, from $18/barrel to a single digit and then to zero, many were left surprised and shocked. Notably, the Brent futures market did not collapse the way WTI fell, though it did decrease by 8.9%.

Brent is a benchmark for international crude oil trading and it closed at $26 per barrel -- $63 per barrel above WTI. However, the negative oil price exposed the Organization of the Petroleum Exporting Countries (OPEC+) and G20 as they failed to bring about the oil balance for supply and demand.

Here it is worth mentioning that with the fall of oil prices in negative territory was presumed that petrol would get cheaper and carry buying price to the extent of the excise duty, dealer commission and VAT. Even, it ignited the opinion among many that they would be paid money for buying petrol. But the negative oil prices didn’t mean any of the two expectations. In fact, the fuel prices went to unprecedented levels and crossed Rs.100 per liter mark.Currently the scenario is contrary to the given situation as lower oil prices are certainly beneficial to oil importing countries like our country. We are dependent on imports for 85% of our oil needs and at the moment the consumption is reported to be 15-16% higher than pre-covid levels. An interesting spending pattern reveals that India spent $62.71 billion on crude oil imports in 2020-21, $101.4 billion in 2019-20, and $111.9 billion in 2018-19. As on October 23, the total increase in petrol price since the May 5, 2020 decision of the government to raise excise duty to record levels totals Rs.35.98 per litre. Diesel rates have during this period gone up by Rs.26.58 per litre. Continued rise in fuel prices has its origin in a complicated taxation system and heavy reliance of central as well as state governments on fuel as a source of revenue. Lack of renewable sources of energy is also projected as one of reasons behind heavy reliance on fuel.

While witnessing the tremendous increase in dependency of mass populations on fuel even in routine day to day activities, the government in the past has cleverly taken the route of petrol and diesel to generate revenue. Raising prices on fuel has proved an easy way for the central government to raise money and meet their expenditure. Even state governments have taken a cue from this modus operandi of the central government. If reports and some financial analysts are to be believed, the government even in pre-covid times has been intelligently using the falling crude oil prices to its advantage. The pandemic caused a massive economic crisis as all sectors of the economy were badly affected. The government was pushed into huge spending on health and other welfare measures to pull its people out of the Covid-induced crisis. As the government was already pedaling on the path of generating huge revenue through taxes on fuel, it further strengthened its grip on the oil and used it to raise funds for the massive expenditure which was unforeseen in pre-covid era.

In the context of generating revenue through taxes on fuel, Union Oil Minister Hardeep Singh Puri is worth quoting when he reacted to the opposition's demand for cutting taxes to soften record high petrol and diesel prices. He equated the move to 'axing one's own feet', saying such levies funded government schemes to provide free COVID-19 vaccines, meals and cooking gas to millions amid the pandemic.The honest statement of the union minister makes it clear that the people in general are being taxed to fund pandemic-induced emergency expenditures. Here it’s a puzzle. The money collected from the public through unprecedented percentage of taxes is making the position of government comfortable on the expenditure front. But at the end, the public is facing a double edged sword as the taxes have triggered high inflation and people have to pay through their nose to buy essential commodities.

Precisely, triggering and driving the steep hike in fuel (petrol & diesel) prices to meet certain expenses is simply an anti-people activity. These hikes have taken away the gains that had accumulated to consumers when global rates witness fall in crude oil prices. In the local context, the hike widens the income – expenditure gap in a common man’s budget. Like in other parts of the country, petrol has become an indispensable part of our day-to-day life, and we can’t now imagine our life without it. Since the petrol prices are skyrocketing, it is eventually going to affect each and everything that we use in our day to day life.

As the economists having an eye on oil price movement have already stated that the fuel prices in the country will continue to surge in the coming times also, it would be better for the consumers to work out means and ways where fuel consumption at their level is brought down to affordable levels. Otherwise they will end up in a fiscal debt – where spending on fuel can beat their limits of income.

The unprecedented rise in fuel prices and the government’s intentions of not cutting taxes on the fuel, have stoked concerns over inflation. Here it is worth mentioning that the fire in fuel prices recently forced the Reserve Bank of India (RBI) to express worry over core inflation and its governor Shaktikanta Das has put the blame on indirect taxes. If way out of unwinding of high indirect taxes on petrol and diesel is not carved out, there would be further build-up of cost-pressures in the economy. This could even push food inflation at the consumer end, which means more miseries for the general public.

(The views are of the author & not the institution he works for)

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