- Date : 17/04/2021
- Read: 8 mins
Understand the relationship between petrol price crossing Rs 100 and what it means to your finances.
February 2021 witnessed petrol prices in India hitting Rs 100 for the first time in certain areas across Rajasthan and Madhya Pradesh. The recent rise in the price of crude oil has been a cause of worry for India’s fiscal health and by extension the financial markets too. The increasing crude oil prices internationally do not pose a serious challenge to the country’s macro stability at this point in time. Having said that, India does need to go on the front foot to tackle the impending fiscal deficit and the subsequent inflation as a result of the oil price climb.
Why are fuel prices rising in India?
International oil prices plunged to a record-breaking two-decade low during April-May 2020 because of the fall in demand thanks to restrictions imposed due to the surging global pandemic. This was compounded by the impact of an oil price war between Russia and Saudi Arabia that began in March 2020.
On 21 April 2021, crude oil prices touched $9.12 per barrel as compared to $70 per barrel during the beginning of 2020. However, as countries emerged from lockdowns and OPEC nations decided to bring down oil production, the crude oil prices recovered and reached $62.66 per barrel as of 6 April 2021.
Before explaining the reasons behind high fuel prices in India, it is important to talk about the deregulation of fuel prices which occurred from 2010 onwards. After petrol was deregulated in 2010 and diesel was deregulated in 2014, oil marketing companies stopped receiving subsidies from the government. From 2017 onwards, these companies have been free to revise fuel prices daily.
In India, fuel prices have been on an upward trend throughout 2020 and have continued to run up during the first few months of 2021. On 1 January 2020, the price of petrol was Rs 80.8 per litre and the price of diesel was Rs 71.3 per litre in Mumbai. As of 26 Feb 2021, the prices of petrol and diesel in Mumbai were Rs 97.3 per litre and Rs 88.4 per litre respectively. The situation seems to have become so dire that certain individuals living in areas close to the international border have resorted to smuggling fuel from neighbouring countries.
As is clearly evident, despite the low crude oil prices in the international market, fuel prices in India have remained high. This is primarily because:
The global pandemic forced the Indian government to impose countrywide lockdowns, which bought economic activity to a halt. This affected government revenues from GST, corporate tax, income tax as well as cess charged on liquor and petroleum.
Thanks to the financial packages announced by the government for providing assistance to various stakeholders who were affected by the lockdowns, government expenditure went up.
The government increased taxes on petrol and diesel to offset the losses incurred due to the points stated above. Incidentally, taxes account for almost 60% of what consumers pay at the fuel pumps.
Related: How increasing petrol, diesel price may impact you?
The table given below presents a holistic picture of the components of fuel price
|Components of fuel price||May 2014 (Price of petrol in Delhi = Rs 71.41 per litre)||Feb 2021 (Price of petrol in Delhi = Rs 86.30 per litre)|
|Base price of fuel||63% (Rs 44.98)||36% (Rs 31.07)|
|Dealer commission||3% (Rs 2.14)||4% (Rs 3.45)|
|State tax||18% (Rs 12.85)||23% (Rs 19.84)|
|Central tax||16% (Rs 11.42)||37% (Rs 31.93)|
The impact of fuel price hikes on the economy and your finances
Fuel price hikes will, directly and indirectly, impact all the industries, organisations, and individuals in the country. Read on to know about some of the most prominent areas that would be impacted.
Increase in fuel bills
If you own a private vehicle that runs on petrol or diesel, you would already be feeling the direct impact of a hike in fuel prices. For example, consider an individual owning a car that covers 36 km in a day. This four-wheeler offers a mileage of 12 km per litre within the city. This means the vehicle consumed 3 litres of petrol per day. When the price of petrol was Rs 80 per litre during January 2020, this person was spending approximately Rs 240 per day on petrol. As of February 2021, with the petrol price being Rs 97 per litre, this person would be spending Rs 291 per day on petrol. This is a significant 20% increase.
Pro tip: You could start by curbing your use of personal transport and take out your vehicle only when it is absolutely necessary. Weekend outings may be reduced as you may be forced to reallocate resources dedicated towards your leisure and entertainment towards the rise in fuel prices.
Hike in air travel fares
Overall domestic and international travel, in general, can become expensive too as airlines may hike their ticket prices in order to absorb the increase in fuel rates. Air turbine fuel (ATF) comprises 40% of the operating cost of an Indian air carrier company. Jet fuel rates have surged over the last few months.
The price of a kilolitre of ATF was Rs 26,456 in Mumbai airport on 1 June 2020. As of 1 January 2021, this had shot up to Rs 39,267. This hike is reflected in airfares as evident from the fact that the ticket price for flying between Mumbai and Delhi has gone up from Rs 3500-Rs10,000 to Rs 3900-Rs 13,000.
Pro tip: Plan your travel and book tickets well in advance. If you’re on a tight budget, you could also consider travelling by rail.
Rise in the price of essential commodities
Skyrocketing petrol prices can also lead to an increase in the prices of essential goods simply by virtue of a rise in the cost of transporting these commodities, countrywide. Even though trains and trucks run on diesel, the transportation of essential goods at the local level could occur through vehicles that operate on petrol. Understandably, the local transporter passes on the burden of the rise in price to the end customer, which is reflected in the cost of the commodities going up. Prices of essential items have increased anywhere between 10% and 30% in the recent past.
For instance, logistics firms have increased their rates by Rs 1 per kg for transporting food and vegetables. Middle-class families would feel the pinch as their grocery shopping baskets are vegetable-heavy. They can expect to spend 5%-7% more while shopping for vegetables.
Pro tip: If you shop offline, you could offer to buy regularly from one of your vendors in exchange for a fair discount. Alternatively, you could explore online options that may offer excellent deals on certain provisions. Also consider replacing expensive items with cheaper substitutes. You can fix a monthly budget by taking your family members into confidence and strictly adhere to it.
Related: Are subsidies good or bad for India?
Shopping or studying abroad would be expensive
As the price of petrol remains sky-high, another indirect impact is the cost of imports rising with the deficit increasing steadily too. The end effect is that the rupee comes under a lot of pressure. The devaluation of the rupee means you will have to shell out a lot more to acquire foreign currency. So, if you are planning to travel overseas or pursue a course abroad, your expenses would shoot up.
Pro tip: If possible, shelve plans of international travel or an overseas education for now and explore domestic options for both.
Rising petrol prices have undoubtedly had an impact on the state of India’s economy. It also has a direct link to consumer confidence along with a re-look at their spending habits. The best way forward under these circumstances is to rejig your finances given the fact that the government has limited options to control this phenomenon. Crude oil stocks: Are they a good type of investment?