Experts say the government needs to find a way to rationalize taxes it collects on petrol and diesel to prevent another round of inflation. The inflationary impact due to the rise in fuel costs is already being felt by millions of consumers in the country, numerous sectors, and businesses.
At a time when India’s GDP is all set to register growth after two straight quarters of economic contraction, rising fuel prices could spoil the recovery mood.
An increase in international crude oil prices, triggered by production cuts by major oil-producing countries, has led to a sharp rise in petrol and diesel rates in India over the past few months.
If price levels remain elevated, another round of high inflation could be triggered. It will directly impact the country’s recovery momentum.
Why India needs lower fuel prices
Experts say the government needs to find a way to rationalise taxes it collects on petrol and diesel to prevent another round of inflation. The inflationary impact due to the rise in fuel costs is already being felt by millions of consumers in the country, numerous sectors, and businesses.
A Bank of America Securities note recently said that a spike in oil prices in India could again stoke inflation and hurt consumption at a time when the economy is recovering.
The note added that a cut in taxes on fuel is the most effective way to maintain consumption levels without incurring much loss. Simply put, increasing prices could have a negative impact on demand, which is key to improving GDP growth.
It further added that if international crude oil prices continue to average above $60 per barrel, the Indian government should cut high excise duty and other charges levied on petrol and diesel.
Despite India’s growth over the years, it is important to remember that it is still an emerging economy where a majority of the population comprises low-income earners. On the contrary, India has one of the highest rates of taxes of petrol and diesel in the world.
Roughly 60 percent of the petrol price in India consists of various taxes, while it is 54 percent in the case of diesel. It is considerably high for a nation that has a comparatively low per capita income.
It may be noted that a non-stop rise in fuel prices — in the middle of a pandemic-triggered economic slowdown — is not ideal for the majority of middle and low-income earners in the country.
It will have a cascading effect on multiple commodities due to a subsequent rise in transportation costs. From corporate offices to mandis, many sectors are feeling the heat of rising fuel prices at the moment.
Higher fuel prices, especially diesel, will ultimately take a toll on the country’s citizens who will have to pay more for almost all commodities and goods that they buy.
All eyes on govt
A large number of citizens and political leaders from opposition parties have urged the central government to provide some tax relief with respect to fuel prices. In fact, Finance Minister Nirmala Sitharaman had said a few days ago that the Centre and states should coordinate and work on lowering fuel prices.
RBI Governor Shaktikanta Das has also expressed concern about the rising fuel prices in India. Das said, “CPI inflation excluding food and fuel remained elevated at 5.5% in December, due to inflationary impact of rising crude oil prices and high indirect tax rates on petrol and diesel, and pick-up in inflation of key goods and services, particularly in transport and health categories.”
“Proactive supply-side measures, particularly in enabling a calibrated unwinding of high indirect taxes on petrol and diesel in a co-ordinated manner by centre and states are critical to contain further build-up of cost-pressures in the economy,” he added.