Huge spike in fuels prices

Huge spike in fuels prices

• Four factors influencing rise in prices:
 Crude oil, freight and processing charges to the dealer.
 Excise duty charged by the
government.
 Dealer commission to the gas station.
 Value Added Tax levied by the state government.

Impacts of taxes on fuel price hike

• Increasing central and state taxes on fuel – key
reason for high fuel prices.

• 2020: Centre hiked the excise duty on petrol and
diesel by Rs. 13 and 16 per litre.
 To shore up revenues.

• Example: In Delhi, central and state taxes – 57 % of
pump prices of petrol and is about 51.4 % for diesel.

• Central government has not cut central taxes – taxes
on auto fuels should be cut to curb inflation.

Fuel price hike and inflation

• When fuel prices rise, so does inflation.

• Higher the inflation – lower will be the inflation-adjusted returns.

• India’s retail inflation became 6.3% in May 2021- breached the upper
limit of RBI (6%).

Way forward

• ICRA: government may cut cess levies on retail prices
of petrol and diesel to ease prices.

• Petrol consumption is estimated to grow 14% and diesel 10% year-on-year in FY22.
 Reason: Recovering economic activities and mobility – easing of curbs and accelerating Covid19 vaccinations.

• Higher consumption of fuels – support a rise in the
indirect taxes levied on them. • Growth in consumption would result in Rs. 40,000 crore of extra cess collections.

• Existing fuel price can be cut by ₹4.50 per litre for
petrol and diesel.

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