Paramjit Singh Vohra
Surprisingly, even when the price of crude oil is low in the international market, petrol and diesel are sold expensive in the country. Obviously, the tax policies of the government are a big reason behind this. These days, there is a buzz again that the retail prices of petrol and diesel in India’s domestic market may increase again in the coming days. The main reason for this is the circumstances of the war between Russia and Ukraine.
Due to this global crisis, the price of crude oil has been increasing continuously for the last few days. Crude oil has crossed $90 per barrel for the first time since September 2014. On February 13, it was $93.10. In January it was eighty dollars and in December it was around seventy five dollars. In the last two months alone, its prices have increased by about twenty-five percent.
The rise in the global crude oil prices has always come to the fore as an economic crisis for the Indian economy. The reason is very clear that India imports about eighty-six percent of its crude oil capacity. India’s crude oil production capacity is only 10 to 15 percent. The need for crude oil is related to the economy and everyday life.
Fuel is used for everything from manufacturing to supplying the items used in homes. The resources of transport are also governed by this. A farmer uses tractors for farming and pumpsets for irrigation, which also consumes diesel. Crude oil is also the main requirement of industrialization. India imports about 1.5 billion barrels of crude oil every year.
About 20 million tonnes of crude oil was imported in December 2021, which was seven percent more than in November 2021. Saudi Arabia and Iraq are prominent among the OPEC group countries from which India buys oil. In the coming times, this will increase further because India is a fast growing economy and the economic policies for the rate of growth in the financial budget presented for the coming financial year are on structural development only. The government has increased its capital expenditure for this. In such a situation, if India has to deal with the increase in crude oil prices, then India itself will have to emphasize on increasing its capacity to produce crude.
The rise in the prices of crude oil in the global markets increases the import bill and its direct effect comes in the form of inflation. The rise in the price of crude oil has multi-faceted effects on the economy. It begins with a comparatively weak rupee against the dollar and increases the cost of imports. Since it is not predictable, it also increases the current account deficit of the economy.
Ultimately, the forecast of fiscal deficit is also affected by this. All this has negative consequences on the Indian stock market as well. This also affects the profits of oil companies. To face all this, the only solution for the government is to increase the domestic prices of petrol, diesel and LPG. For this, the central government makes excise duty as support, then the state governments value added tax (VAT). And from here it starts affecting the common man.
India is the largest crude oil importer after the United States of America. This status is a bit surprising because the manufacturing sector in India is neither as strong as that of America nor India’s per capita income is close to the per capita of America. But it is the common man who has to suffer financially. India imports about 1.5 billion barrels of crude oil every year. The capacity of a barrel is one hundred and sixty nine liters. Crude oil is paid in US dollars.
Therefore, first of all, the global value of the dollar against the rupee forms its basis. If the rupee is strong then crude oil will be cheaper and if the rupee is weak then the cost of importing crude oil increases, even if the global crude oil prices are low. For example, if the value of dollars is taken around seventy, then the cost of one hundred and sixty nine liters per barrel will be forty one rupees per liter in Indian currency.
This is the initial cost. After this, many other types of taxes and costs are also added to it, in which oil refining, freight, dealer’s profit etc. together determine the cost in the domestic market. Thereafter, the final combination of excise duty levied by the central government and Value Added Tax (VAT) levied by the state governments determines the retail price in the domestic market.
Now that crude oil is getting costlier in the global markets, it is obvious that its direct loss will be to the economy. For this, the easiest and only solution that governments see at their level is to increase the prices of petroleum products in the domestic market. But this is a one-way solution to this problem. This directly increases inflation. The burden of taxes increases the transportation cost. The cost of transportation of everything from food items also increases. And its direct burden falls on the pocket of the common man.
Talking about the rates of taxes, in the last few years, there has been a huge increase in Central Excise Duty. Whereas excise duty on petrol was Rs 9.48 per liter five-six years ago, it went down to around Rs thirty five till last year. There has been more increase on diesel as compared to petrol. Till a few months ago, the price of petrol and diesel in India’s domestic market had gone above one hundred and ten rupees. Although there was a slight reduction in tax rates during the festive season, it did not have much effect. The inflation that has increased due to this has not come down yet. Inflation in the domestic market remained above five per cent in December. There has been a big reason for the prices of petrol, diesel and LPG in this.
Indian economy is continuously increasing its size. Recent reports from several global economic institutions have also predicted that India will be among the countries to achieve a growth rate of more than nine per cent in the next few years. The need for crude oil will continue to grow. Therefore, the time has come for the government to change its strategy and insist on making short term agreements with the importing countries. In fact, economic policies should be made in such a way that the increase in oil prices in the global markets does not affect the common man.
Surprisingly, even when the price of crude oil is low in the international market, petrol and diesel are sold expensive in the country. Obviously the tax policies of the government are a big reason behind this. Therefore, there is a need to emphasize the rationalization of selling petroleum products in the domestic market and the taxes levied on it.
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