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Fuel price has become the talk of the town with petrol currently retailing above INR 90 per litre in all major cities across the country and having already touched INR 100 in some places following continuous hikes by oil marketing companies. Diesel prices too have hit a record high. This has led to demand from several quarters, including political parties to the Centre government to intervene and ease spiralling fuel prices. The government no longer has control over fuel prices as it is the oil marketing companies that determine it based on global crude oil prices. While the firming up of crude oil rates in the international market is mainly responsible for this rise, the central and state governments have a hand in it. It’s a fact that both the Centre and states levy extremely high taxes on fuel. For instance, the base price of petrol in Delhi, as on February 16, 2021 was INR 31.82 per litre, while excise duty accounted for INR 32.90 per litre and value added tax stood at INR 20.61 per litre besides other taxes, rounding the retail price at INR 89.29 per litre. Scenario is not different with diesel as it was retailing at INR 79.70, which was a build-up of INR 33.46 per litre base price, excise duty of INR 31.80 per litre, and value added tax of INR 11.68 per litre. The data from the Indian Oil Corporation indicates that taxes levied by the central and state governments constitute a chunk of the retail prices of fuel in the country.
While fuel has become a significant source of revenue for both the central and state governments, and cutting taxes could cost it dearly, the cascading effect that an uncontrolled hike in petrol and diesel prices could have on the economy cannot not be overlooked. High rates of fuel prices will reduce the purchasing power of the people and lead to inflation. It can affect several sectors including automotive sector, which provides employment to many. Rise in operational costs due to fuel price hike could lead to increase in public transportation fare and freight cost. Such a scenario can trigger a chain reaction in the prices of most products and goods, including vegetables and fruits. At the end of the day, it is the public who will suffer; and India’s economy, which is already affected by the Covid-19 pandemic like most countries across the world, may take longer than expected to recover. Considering the possible devastating impact that continuous increase in fuel prices could have on the economy, the Reserve Bank of India Governor Shaktikanta Das urged both the centre and the state governments in the Monetary Policy Committee (MPC) minutes to slash indirect taxes on petrol and diesel, stating that such measure could ease the cost-push pressures. As many as five states, including Nagaland have taken the lead to offer relief to consumers by cutting tax rates on petrol and diesel. Now, the remaining states and the Centre should follow suit and arrest the possible damage spiralling fuel price could cause the country’s economy. The government should also revisit its taxation strategy in the oil sector and come up with a viable policy to avoid similar situations as fluctuations in global crude oil prices could amplify in the future.