Petrol and diesel prices have not been hiked in the last four days but they are still at a multi-year high. The fuel prices in India has risen due to the international oil price rally since October last year. After a three-year-long low price windfall, the Narendra Modi government is facing oil as one of the biggest challenges. It is not only hurting common-man but also poses inflationary risks and adverse impact on the GDP growth.
“India is a net oil importer and a sustained upside risk to crude price hike will likely have adverse macroeconomic implications, specifically in terms of a negative trade shock worsening the current account deficit and the fiscal deficit,” Anis Chakravarty, Economist at Deloitte India said. A 10% increase in the fuel prices will lead to a direct increase of around 0.5% in WPI and around 0.25% in CPI.
The rise in prices is due to production cuts by both OPEC and Non-OPEC countries caused supply disruption along with unrest in some Middle Eastern countries. But prices are also high due to high taxes levied by both central and state governments. “Presently it appears that the government would rather not lower the tax rates,” Care Ratings said.
Given the current scenario, Care Ratings said that there is a strong case for bringing petrol and diesel under the ambit of Goods and Services Tax (GST). “Instead of the effective tax rate of 100% on petrol and 66% on diesel, GST of 90% and 80% are applied on petrol and 60% and 53% on diesel. This is 10% and 20% reduction in effective tax rates of 100% and 66% respectively for petrol and diesel,” Care Ratings said in a report.
“If exchange rate and dealer commission (are) to be constant, there would be a decline in the retail prices by approximately 5-10% in petrol and 4-8% in diesel,” it added. If not GST, then with the crude oil price increasing, the choice is between lowering the tax rate or increasing subsidy, it said.