In Sri Ganganagar town of Rajasthan, the retail price of petrol has reached in three digits for the first time in Indian markets. This is culmination of a series of price hikes over past one year. Over 25% rise in domestic retail fuel price has happened when the average global crude prices have been much lower. Even on yoy basis, the brent crude prices are almost unchanged presently; and INR is stronger by over 5% as compared to USD.
The consistent rise in transportation fuel, when the consumers were deep in distress, economy was struggling and crude prices were falling sharply, has invited sharp criticism of the government. It is pertinent to note that all subsidies on transportation fuel were removed some years ago and presently none of the transportation fuel is subsidized. Therefore the rise in fuel prices cannot be attributed to rationalization of subsidies. Social media is also full of satirical memes about the consistently rising fuel prices.
In this context, it is also pertinent to note the following:
(i) Retail fuel prices started rising sharply from May 2020, when the first of various Covid-19 stimulus packages was announced by the government.
(ii) The rise in fuel prices has occurred when the consumption had declined.
(iii) Most part of the rise in retail fuel prices could be attributed to additional duties and cess imposed by central and state governments.
India’s annual oil consumption is over 19 billion barrels approximately worth Rs9.5trn. A 10% hike in duties and cess on retail oil price would be Rs1trn, more than the amount provided for distribution under direct cash transfer (PM KISSAN) scheme to 12million rural poor.
A valid question to ask therefor would be “is the government using duties and cess on retail fuel prices for the purpose of wealth redistribution and socio-economic equity?”
In my view, it is a complex problem and needs much deeper study. On the face of it may appear a straight forward transfer of money from those who could afford (consumers of transportation fuel) to those who need it badly. However, if we consider the following propositions, the issue may not appear as simple.
(a) Meeting a significant part of the rise in social sector expenditure and subsidies through higher duties and cess on transportation fuel has allowed the government to keep fiscal balance in check with lower than anticipated market borrowings, allowing RBI to keep the benchmark yields and borrowing cost for large borrowers at relatively lower level.
It would be interesting to examine, how much “large borrowers” have benefitted from lower interest rates and stronger INR, as compared to the loss on higher fuel cost.
(b) For businesses higher fuel cost is mostly a pass through expense, meaning the incidence of higher fuel cost is passed on to the end consumer. Given that the propensity to consume is much higher at the bottom of the pyramid, implying that on relative basis the poor people may be hit more by the rise in consumer products due to higher fuel prices.
(c) The cost of travel in public transport has not increased in tandem with the rise in transportation fuel. The rise in transportation fuel duties could also be a design to implicitly encourage people to use public transport.
