- Date : 07/04/2021
- Read: 5 mins
The overall impact of soaring petrol and diesel prices
It can be argued that fuel is a commodity whose price impact every aspect of our lives. Thanks to its essential attribute as an integral part of the transportation sector, an increase in petrol and diesel prices in India can have a cascading effect on various other sectors and have a deep impact on the economy.
It is no secret that petrol and diesel prices in India have been rising consistently over the years. But they have shot up tremendously during the last few weeks. The trajectory of fuel prices has undergone a steep upward curve during the last three months. In Mumbai, for example, the price of petrol has risen from Rs 87.80 per litre in November 2020 to an eye-watering Rs 97.57 in March 2021. Read this to know why Mumbaikars pay the highest price for petrol.
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Reasons for increasing petrol and diesel prices in India
There are several reasons for the ongoing fuel price hike. It is useful to understand the underlying causes of the rise in petrol and diesel prices before forming an opinion on the same.
1. Cost of crude oil:
The cost of crude oil per barrel has increased globally. This is evident from the fact that crude oil
price per barrel rose from $20.39 on 4 May 2020 to $65.39 on 15 March 2021. This is due to supply curbs being continued by the oil-rich oil-producing countries, also known as OPEC (Organisation of Petroleum Exporting Countries). This is the predominant cause of the current fuel price hike.
2. Reliance on import of fuel:
India imports more than 80% of its fuel requirements. It is in fact the third largest importer of crude oil after the US and China. This reliance on international imports means that any change in fuel price has a direct impact on the country’s prevailing domestic fuel prices.
3. Dollar exchange rate:
The price of crude oil barrels is set in and paid for in US dollars. The exchange rate has hovered at USD 1 being equivalent to approximately INR 72. This rate also has an inflationary effect on the price of petrol and diesel prices in India.
4. Government taxes:
Last but not the least – the Indian Government taxes on fuel are among the highest in the world. In February 2021 the break-up of petrol price looked like this:
|Base Price & Frieght||₹ 32.10|
|Central govt. taxes||₹ 32.90|
|State govt. taxes||₹ 20.61|
|Dealer commission||₹ 3.68|
|Retail selling price||₹ 89.29|
As you can see, government taxes form a huge portion of the eventual fuel cost. Even when the crude oil prices have dipped in the past we have not seen a commensurate correction in fuel prices. In the last three months, the decision of oil marketing companies to raise prices has influenced fuel prices rather than the government changing its rates.
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Impact of increasing fuel prices
1. On budgets and lives of common households and individuals:
According to a survey, 51% of respondents admitted that they were cutting expenses on other essentials to manage their spends on fuel. An average two-wheeler uses around 15 litres of fuel every month. Petrol price per litre was Rs 71.94 per litre in February 2020 as compared to Rs 97 in March 2021. This means the user of a two-wheeler would be spending around Rs 420 more on petrol every month.
A majority of Indian households strictly budget their monthly expenses. The increase in fuel prices is a direct hit on their wallets. Households will have to find ways to manage when the commensurate effect of the fuel increase will start reflecting on the increasing nature of other essential commodities as well.
2. On various businesses:
The auto sector has already started bearing the brunt of the increase in fuel prices. Sales across passenger vehicles and two-wheelers have dropped in January 2021 and this trend is likely to continue. This would also impact the auto ancillary sector.
Companies in the logistics and transportation sectors have decided to increase their rates by 10% to 15%. Needless to say, even other industries that do not have a direct dependence on fuel would be impacted as transportation costs will increase following the fuel price increase.
After suffering the double whammy of demonetisation and lockdowns, it would be an understatement to claim that SMEs and MSMEs would be extremely wary of any hike in fuel prices.
3. On the economy of the country in general:
The rising fuel prices will impact the cost of every commodity, resulting in price hikes all sectors. As each sector uses transportation in some form, an increase in transportation cost can cause inflation overall. With the job market yet to pick up, the rise in fuel prices may delay an uptick in employment levels for some more time.
Along with the economic slowdown caused due to the ongoing COVID-19 pandemic, the drastic rise in fuel prices has impacted individuals, households, and companies. With the Central Government unwilling to cut down on taxes, the common citizen seems to be in for difficult times ahead. Crude oil stocks: Are they a good type of investment?