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General Studies-3; Topic: Economic growth

Rising Fuel Prices

1) Introduction
 The pricing of petroleum products is always a contentious issue.
 There has been lot of hue and cry over the rising prices of petroleum products in recent months.

2) Present Status
 Prices at the pump have surged on the back of increase in international crude oil prices.
 Crude oil hit their strongest since late-2014 amid ongoing production cuts led by the Organization
of the Petroleum Exporting Countries (OPEC).
 Other reasons include robust demand, Political instability in Venezuela and the prospect of US
sanctions against Iran for the rise in fuel prices.
 Assorted taxes levied by the Centre and states and increasing dealer commissions have inflated the
retail prices of auto fuels.

3) Impact
 In the decontrolled regime that India is currently following, any change in international crude price
is passed on to the consumer.
 With rising crude prices and a depreciating rupee, petroleum is bound to get more expensive.
 India’s import bill is set to increase as the country imports nearly 83% of its crude oil requirement.
 Rising prices has a large impact on domestic inflation.
 The rising prices increase the burden on citizens, affecting to some extent the government’s
popularity.
 A one-dollar increase in the international price of crude oil increases the cost of petrol and diesel in
India by Rs 0.50/litre.
 A fall in the exchange rate of the rupee against the US dollar increases the cost of petrol and diesel
in India by Rs 0.65/litre.
 Higher prices are likely to reduce consumption.
 It has a negative impact on economic growth.
 It causes stress for commercial-vehicle operators, for whom fuel accounts for a significant
proportion of overall costs.
 Most borrowers in these pools are small operators that depend directly on their vehicles for
income, and some could find it difficult to make repayments if their margins continue to be
squeezed.

4) Arguments for reducing taxes on petroleum products

 The taxes imposed by the Centre are specific — fixed in terms of Rs per unit.
 So, if the consumption falls, the tax collected by the Centre also goes down.
 The states, however, levy ad valorem tax and it is likely that with the increase in petroleum prices,
its tax collection goes up even with falling consumption.
 The argument that the taxes on petroleum products should be reduced in wake of the increasing
international prices, applies more forcefully to the states than to the Centre.

5) Fuel for Development

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 Taxes on petroleum products are a major source of revenue for the exchequer.
 It helps the government bridge its budgetary deficit.
 India needs this revenue for catalysing economic growth, building infrastructure for better quality
of life and providing social security to the poor and in backward areas.
 A large component of central government duties on petroleum products is given to state
governments.
 Some amount is spent on centrally-sponsored welfare schemes in the states.
 It is estimated that a Rs 1 reduction in the excise duty would reduce revenue collection by Rs
14,000 crore.

6) Concerns / Challenges
 India is particularly at risk from stronger global prices for crude oil as it is the third biggest importer
of the commodity, buying about 83 per cent of its oil needs.
 India is also facing US pressure to reduce its oil imports from Iran, which could further increase
Indian fuel prices.
 The concern over crude oil prices stems from India’s energy import bill of around $150 billion,
expected to reach $300 billion by 2030.
 Elevated oil prices could affect India’s trade deficit.
Consequently, the current account deficit could also increase.

7) Way Forward
 The low hanging fruit is cutting excise duty.
 The long-term solution is to change the share of petroleum products in energy consumption mix.
 Switching to alternative fuels like ethanol, methanol, bio-compressed natural gas that will not only
cut crude oil import bills but also create additional sources of income for farmers.
 Focus on electricity generation from hydro, nuclear and other renewable sources like wind and
solar.
 Convert a portion — maybe 50 per cent — of the excise on fuel into a cess, which could be used
solely to fund railways, metro, highways, irrigation, port and other infrastructure projects.
 Consumers may not mind paying more in taxes, when they know where that money is going.
 Government must bring petroleum products under the ambit of goods and services tax (GST) in the
interest of consumers.
 Also alternative sources of revenue must be thought of by the government.

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