Fuel touches heights, Yet Again!

Someone said that soon it will be cheaper to get people to push the car, rather than filling fuel and then driving it! The day has arrived where filling fuel is more costlier than ever!

Given the fact that India is Asia’s second-largest oil importer, the country cannot afford higher fuel prices, especially as demand improves after the second wave of the Covid-19 pandemic.

There are several reasons why experts feel that the government should reduce oil prices. For instance, if petrol and diesel pieces remain at their current levels or increase in future, the demand for two essential fuels will decline sharply and ultimately hurt the government’s revenue collection.

In May, fuel demand hit a nine-month low due to stalled activity amid the second wave. While it is expected to improve in June, the record-high rates may significantly stall recovery in fuel demand. This would end up lowering the government’s revenue collection from the sale of the two essential auto fuels.

Inflation is another reason why economists are worried about rising fuel prices. India’s retail inflation jumped in May, breaching the Reserve Bank of India’s comfort level, primarily due to a hike in petrol and diesel prices.

It may be noted that fuel prices directly impact several sectors including transport, food delivery and e-commerce. The cost that consumers bear for such services — directly or indirectly — have been rising gradually over the past two months as a result of rising fuel prices.

Experts suggest the higher fuel prices would severely dent consumers’ disposable incomes and the end result will be slower growth and economic recovery.

CONSUMERS UNDER PRESSURE

For most parts of 2020, the central government kept increased taxes on fuel as the country went under a national lockdown. The excise duty was hiked sharply last year despite a collapse in global crude oil prices.

The government claimed that the prices were hiked to support revenue as other areas of income including GST and income tax collapsed.

However, it has now been more than a year that excise duties have not been slashed, leaving domestic consumers exposed to higher prices following a recovery in international crude oil prices.

A Reuters report had earlier indicated how India’s low income earners — engaged in micro delivery businesses and other activities dependent on fuel — are suffering due to exorbitant petrol and diesel prices. It is equally hurting India’s poor households, who are paying more money for other commodities and services that are indirectly dependent on fuel prices.

Experts believe that the higher fuel prices and the cascading effect it has on other commodities will lead to a fall in overall demand, given the weak consumer sentiment at the moment.

Even the burgeoning middle class, considered the engine that’s driving India’s growth, is facing the heat due to rising petrol and diesel prices.

A 48-year-old former executive at an ad agency in New Delhi told Bloomberg News that he had upgraded to a new car just a month before the country went into a nationwide lockdown last year.

He is now considering selling his vehicle. “Driving the car is now a luxury for me,” said the man, who had lost his job after the first wave. He now trades in stock and his income is hardly a fifth of what he used to earn at his previous job, he also added that – “Earlier, I would tank up whenever I needed to refill, and it would cost me 3,000 rupees ($40). Last time, refilling less than half the car’s tank cost me more than $25. I now drive only when it’s absolutely necessary,” he told the publication.

CUTTING TAXES NECESSARY

Experts believe that economic recovery will become tricky if the government continues to ignore rising fuel prices. If the commodity becomes too expensive, it would see a sharp decline in revenue.

To avoid such a scenario, the government should cut excise duty to some extent as it will provide some relief to customers and lead to higher sales and revenues.

Senthil Kumaran, head of South Asia oil at FGE, told Bloomberg News that higher prices will have an impact of fuel demand. “But, at this point, the price effect will be less significant as the country is still coming out of the second-wave lockdowns. Pent-up demand will outshine high retail prices, so, it won’t pause the demand recovery. But if high prices continue through July, then it will impact more.”

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