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fuel prices are back to haunt Indians

fuel prices are back to haunt Indians

amidst the rise in global crude oil prices, there are worries about fuel price hikes in India.
March 23, 2022
5 min read
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amidst the rise in global crude oil prices, there are worries about fuel price hikes in India.

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what difference would a Rs 6 hike in fuel prices make? a lot. and in more ways than you can imagine. yes, driving to work will become expensive, but that’s not all. food delivery prices, grocery, and even personal care products will get costly. 

from your morning coffee to late-night snacks, all goods are transported using fuel. the moment petrol and diesel prices are hiked, the distribution costs go up. companies will pass on these costs in the form of a higher MRP. 

if you are wondering why we are suddenly talking about this, it’s because India is on the brink of another round of fuel price hikes. with the Russia-Ukraine war escalating further, International Brent crude is trading at $102 levels. 

an ICRA report said that fuel price hikes in the range of Rs 6-8 in the country will help mirror the global rate increase trends. 

however, this rate of surge will hit customers and businesses hard. an immediate impact would be a fall in vehicle sales, which will impact employment prospects in the automotive industry. 

the oil crisis is bubbling over

the basket of crude oil that India buys rose to $117.39 per barrel on March 3, an eight-year high according to the Petroleum Planning and Analysis Cell of the oil ministry. this compares to an average of $81.5 per barrel price of the Indian basket of crude oil at the time of freezing of petrol and diesel prices in November 2021. 

on March 14, petroleum minister Hardeep Singh Puri said that the government will take all the necessary measures in the coming months to ensure that consumers get relief from high fuel prices. 

he said a proposal to bring petroleum products under the Goods and Services Tax was taken up by the GST Council, but it did not find favor. he added that nine states, including Maharashtra and Kerala, had not reduced VAT on petrol and diesel which is causing prices to stay high. in Maharashtra, for instance, the value-added tax or VAT on petrol is approximately Rs 31 per liter. 

so this means that apart from the international oil situation, fuel price in India is also determined by freight charges, dealer commission, central excise duty, and VAT. in Delhi, for instance, taxes contribute around 60% of the petrol price and 55 percent of diesel charges.

while experts have sought an excise duty cut on petrol and diesel by Rs 10-12 for immediate relief, the government has not indicated any such move. the excise duty on petrol stands at Rs 27.9 per liter and diesel at Rs 21.8 per liter. 

just between April and December 2021, India paid $82.4 billion for the crude oil it imported. a price discount would help reduce the import bill, which could then be passed on to oil companies through an excise rate cut. state governments will also have to cut the VAT for a reduction in fuel prices. 

is there a recovery in sight?

Puri told the Parliament that while fuel prices had gone up by over 50% in countries such as the United States, Canada, Sri Lanka, and France, India only saw a 5% rise  during the Covid-19 pandemic.

fuel consumption in 2022-23 is estimated to rise to 214.5 million tonnes from 203.2 million tonnes (expected) in the financial year ending March 31, 2022. this means that the oil marketing companies will eventually pass on the crude price hikes to the end customers. 

while oil prices have fallen from the $117 levels, this has not yet resulted in lower petrol and diesel prices in the country. as of March 15, fuel prices remained unchanged across major metros. 

a situation of heightened volatility prevails globally with the United States imposing a ban on Russian oil due to the latter’s invasion of Ukraine. Russia is the world’s third-largest producer of crude oil and the second-largest exporter. so, price hikes and a ripple effect on global exports are inevitable. 

the Indian government has said that it is closely monitoring the Russia-Ukraine situation and prepared to take ‘any action’ for calming the crude oil price rise. 

while the government had reduced the excise duty on petrol and diesel by Rs 5 and Rs 10 per liter respectively in November 2021, the country may need a repeat of these actions to keep prices under control.