With the price of Brent nudging $80/barrel and Goldman Sachs already talking of $ 90/barrel, the Indian economy is in for tough times.
With the price of Brent nudging $80/barrel and Goldman Sachs already talking of $ 90/barrel, the Indian economy is in for tough times. The Evergrande issue has turned out to be less of a problem than anticipated. It has not really slowed down the increase in energy prices so far; the consensus appears to be the world economy will continue on its recovery path and that the demand for oil will only go up.
Unless the trend reverses, prices of auto fuel in India—now over Rs 100/litre in several cities—are likely to remain elevated. This will reflect in retail inflation soon enough; for the moment, the slight fall in food inflation has helped rein in the headline numbers. Should consumer inflation continue to hover close to 6%—the upper end of the 4-6% tolerance band—RBI will find it difficult to justify its current accommodative stance for too long.
In January 2020, before the pandemic, the price of Indian crude was $64/barrel and petrol cost Rs 75/litre in Delhi. In April, the crude price dropped to $20/barrel, but the petrol price came down to just Rs 70/litre. In July, this year prices of crude oil had moved to $73.50/barrel following which the petrol price crossed Rs 100 a litre. The 15% increase in the price of crude oil has translated into an almost 33% increase in price of petrol.
While the fiscal compulsions are, no doubt, overwhelming, with the recovery gaining momentum and tax collections robust, the government should take steps to rein in prices of auto fuel. GST collections have been robust and are expected to average Rs 1.15 lakh crore a month. Direct tax collections have surpassed all expectations, having risen 47% year-on-year to Rs 6.45 lakh crore as of September 22, with net collections having risen 74% to Rs 5.7 lakh crore.
The Centre and the states together earned Rs 6.35 lakh crore in revenues from all fuel products in FY21 at a time when overall consumption declined by 9.1%. The Centre levies a specific rate currently, Rs 31.80/litre for diesel and Rs 32.90/litre for petrol; states impose a VAT which is ad valorem and so any increase in prices means more revenues.
The high levies petrol and diesel could dampen the demand for vehicles. While high fuel costs justify the move to electric vehicles (EVs), the auto industry needs to be supported until the EV infrastructure is in place. The costs of owning an ICE vehicle have risen sharply over the past few years on account of regulatory, safety and technology changes.
Apart from the direct impact of the high prices, the cascading impact of fuel prices also hurts consumers. As this newspaper has pointed out, the impact of servicing the legacy oil bonds, relative to the revenues now being generated, is not exactly debilitating. The total repayment obligations are just about Rs 1.43 lakh crore over a 10-year-period starting FY15. Assuming the current assorted levies on fuels remain unchanged until FY24, the government would make an estimated Rs 14.3 lakh crore in revenues after paying off the loans. The government must work harder to meet its disinvestment and strategic sales targets and look to mobilise revenues from other sources so that it can lower levies on fuel.