Tax cuts on fuel now inevitable to avoid cascading inflationary effect

Rohit Chandavakar
Tuesday, 23 January 2018

Urban Indians in cities like Pune and Mumbai are now reeling under the shock of fuel price hike. On Monday, the price of petrol in Pune city and in Mumbai crossed the psychological barrier of Rs 80 per litre. The price is now at an unprecedented level and it has reached this stage through successive small hikes of Rs 1 or even less every day in the last 20 or 25 days. Apart from the government’s tax burden which has risen substantially in the last 16 to 18 months, the other reason for the hike in prices is rising demand for oil in the international markets.

Urban Indians in cities like Pune and Mumbai are now reeling under the shock of fuel price hike. On Monday, the price of petrol in Pune city and in Mumbai crossed the psychological barrier of Rs 80 per litre. The price is now at an unprecedented level and it has reached this stage through successive small hikes of Rs 1 or even less every day in the last 20 or 25 days. Apart from the government’s tax burden which has risen substantially in the last 16 to 18 months, the other reason for the hike in prices is rising demand for oil in the international markets.

A series of international events in West Asia and elsewhere contributed to the price rise as the year rolled to an end, helping the prices to rise and demand to peak. Will it continue is the question many ask. Analysts are divided on this. Some see prices rising to $80 a barrel in 2018 itself, citing ongoing geopolitical tensions. Others, predicting rising growth from America’s fertile shale fields, aren’t so sure.

A year ago, some analysts were predicting the Organisation of the Petroleum Exporting Countries (OPEC) and its allies would be disciplined enough to harness production. The cartel and partners such as Russia have largely kept their pledge, helped by supply disruptions in Libya and Venezuela. In November, the group agreed to keep the cuts in place for all of 2018 and beefed up the agreement by including Nigeria and Libya.
In India, the situation is tough for the companies as India imports about 85 per cent of the oil consumed in Asia’s third-largest economy. 

Government levies kept the prices high even as Brent retreated from $115 a barrel about four years to go to below $30 in early 2016. Petroleum prices began rallying again on production cuts by the Organisation of Petroleum Exporting Countries in January last year. Low inventories in the US, the biggest consumer of fossil fuels, and geopolitical tensions aided its rise.
Overseas demand for American oil has grown substantially, exceeding 1 million barrels a day almost every week since late September, when ports and terminals along the Texas coast finally recovered from Hurricane Harvey. Many foreign refiners will pay a premium for crude from US shale fields because of its easy-to-handle properties and the high proportion of valuable fuels it tends to yield.

India has been concerned about the rising international prices. The government in India recently gave up on part of its excise income. On 3rd October 2017, it lowered excise duty on petrol and diesel by Rs 2 each. But the central levy on fuels is still twice of what was charged three years ago.

Demand for petrol and diesel had slowed down last year, keeping prices in check. Fuel consumption rose 4 per cent in 2017. That compares with 7 per cent growth in each of the previous two years.

That’s because oil marketing companies like Hindustan Petroleum Corporation Ltd, Bharat Petroleum Corporation Ltd and Indian Oil Corporation Ltd. chose to lower margins instead of increasing prices. For those unaware, India has deregulated fuel prices. Which means they are linked to market rates and change or should change, every day.

But now there is pressure and in a politically sensitive year, the government will have to either cut some more excise and other taxes or find some other way of providing relief to the people. When oil prices in the international market were at $110 per barrel in 2013, the prices in India were around Rs 76 per litre.

Now, if the international prices are at $63/65, the domestic prices in India should be under Rs 75 in any case! The government must cut taxes on fuel because the risk in rising fuel prices is that it has a cascading inflationary effect on the economy. India cannot afford that in the present circumstances.

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