The COVID-19 pandemic has hit the global economy very hard, and India is no exception. Things are indeed looking up in the first quarter of 2021. Yet, the prices of some essentials, like fuel, are sky-rocketing.
Here are the real reasons behind this:
The Government of India has incurred severe losses in revenue thanks to the pandemic and the consequent lockdown. In the initial months of lockdown, there were severe restrictions in the movement of goods across borders. This significantly hampered India’s exports and created a vicious cycle in the domestic economy, where the demand for goods and services also went down. All this meant a drastic decrease in government revenue in the form of direct and indirect taxes.
In recent months, the government increased taxes on petrol and diesel to make up for heavy losses. This meant increasing the excise duty by the central government and VAT by state governments.
Import of Crude Oil
According to government data, India imports more than 80% of its demand for crude oil. This is the biggest factor that contributes to significant price fluctuations in the domestic price of fuel. When the coronavirus pandemic hit initially, there was a global reduction in fuel prices due to decreasing fuel demand. Yet, as the market is slowly recovering, you can see the jump in oil prices again thanks to renewed imports.
The weak exchange rate of the Rupee in India means that the government can purchase lesser quantities in the international market by shelling out more money. This translates into a higher domestic price because the government needs to raise that kind of money from somewhere to make the purchase. The only way to do that is to levy extra taxes on the consumer.
Implications for the Consumer
69% of the price you pay for your car’s fuel is just the tax you pay for this product. Between January 2020 to December 2020, the excise duty levied on petrol has almost doubled. You can find the accurate breakup of the petrol price here.
It is an unfortunate vicious cycle that the economy is trapped in currently. Moreover, the Covid-19 pandemic has not eased the fiscal stress that the government has been facing for a while now. It looks like the imbalance will need a lot of effort and time to close the gap, if not remove it altogether, in the future.