What are the reasons behind the hike in petrol and diesel prices?
Petrol and Diesel prices went up every single day since June 7. In Delhi, the rise in the petrol price was hiked by Rs. 9.12 per litre between June 7 and June 26 while diesel is at its super speed with a hike of Rs. 11.01 per litre. One of the reasons behind it is Crude Oil, it is tanked up for a while now and yet the fuel price in India remained consistent. But Crude Oil isn’t the end product, it requires additional refining to get fuel and diesel. There is a need to pump the crude oil using a process and turns into a consumable product. Yes, you have reached the key distinction.
The price of the end product depends on the level of complexity and procedure it has gone through to reach its desirable use. Take an example of Diesel, it is heavier, less volatile and easier to refine than petrol. Diesel has always been more affordable than petrol as the government doesn’t take much tax on it because of its high usages by trucks, industries, farmlands, generators etc, even personal vehicle. Diesel seems to be cheaper than petrol in most of the country around the globe. But that trend seems to be reversing.
The price of crude oil has doubled in the past two months as the international demand for crude oil has risen with the easing of this lockdown curbs. According to Indian Oil Corporation Limited (IOCL), due to lockdown, there was a dive in 60% in petrol consumption and 55% in Diesel usage. But businesses don’t stop suddenly, the companies still have to ship the oil, continue with the refining process, paid salaries to the employees even though there aren’t enough consumers buying fuel.
But the OMCs (Oil Marketing Companies) cut the mustard and stopped revising the prices and they saw the coming downfall and tried to keep their margin intact. As the prices for fuel and diesel were less, consumers were still not able to buy them due to lockdown. Here when the government saw an opportunity to make some money out of it by increase excise on fuel and diesel. It isn’t like an ordinary tax, the excise is paid by the producers and sellers. Therefore, when the government applied on excise, the companies have an option whether to bear it themselves or pass on to the consumer. They choose Consumer! But they didn’t have much of a choice because of the sudden increase in petrol by Rs. 10 per litre and diesel by Rs 13 per litre by the government.
Were there any short-term reasons?
At the beginning of April, the total excise duty on Petrol stands to be Rs. 22.98 per litre and diesel stand to be Rs. 18.83 per litre. The duty stands currently at Rs. 32.98 per litre for petrol and Rs. 32.83 per litre for diesel. The central government tax increase brings a big beating to the economy due to the incertain Covid-19 crash mainly to bring some revenues. They have brought the entire fall out to the oil prices without considering the consumers.
The major reason for this hike is to improve the GDP for the current year. According to the previous experience, the gross tax revenue collected on oil prices increase to 9.98% of GDP to 11.22% in 2017-2018 and this jumped to Rs 2,23,922 crore in 2017-18 by Rs 46,386 crore.
How the hike in the fuel prices affects the common people?
Rising in the petrol prices hurts the common people most as two-wheelers are the biggest consumers of petrol. In the survey conducted by Neilson, two-wheeler top consumption is almost 61.42%, followed by a car with 34.33%. Therefore, a rise in the fuel prices can dent the savings account of common people by adding to the monthly for not only fuel but also other commodities. Madan Sabnavis, the chief economist at CARE rating said that high fuel prices for a long period may force households to reallocate the resources.
Increase in the fuel prices means that the transportation cost will increase all over the country which in turn increases the price of essential commodities such as fruits and vegetable as well as other goods. Another reason can be the increase in the interest rate implemented by the Reserve Bank of India due to high inflation. Therefore, anyone taking a loan will have a second thought, whereas on the other side it has a positive effect on the savers benefitting higher rate of return. Another major impact on common people will be foreign travelling, education, trade or business. The increase in crude price will affect the external account, cost for shipping goes up and pressure on rupee is high. So if someone is planning for a holiday, or to study abroad, the depreciating exchange rate will be the major impact. It also affects the business that has dealings in foreign currency.
It’s better to get ready for the impact and rejig the finances as the government have limited options to prevent the rise in oil prices or rupee depreciation.