In recent times, petrol and diesel prices in India have remained on a steady upward trajectory. Examine the causes that are fuelling such trend and discuss the consequences of it. What can the government do to ease the situation? (200 words)
Refer – The Hindu
Enrich the answer from other sources, if the question demands.
IAS Parliament 7 years
KEY POINTS
Causes
· Dynamic pricing – In 2017, India’s state-run oil marketing companies switched to a dynamic pricing approach to set prices of petrol and diesel on a daily basis.
· The move was aimed at helping ensure a market-driven approach to fuel pricing by enabling oil firms to factor in day-to-day fluctuations in crude oil prices as well as movements in the exchange rate of the U.S. dollar to the rupee.
· As a result, with both crude oil and the dollar becoming significantly dearer over the last six months, petrol and diesel prices have remained on a steady upward trajectory countrywide.
· Besides the cost of crude oil and the exchange rate, the incidence of Excise Duty (levied by the Centre) and VAT (charged by the respective States), along with a nominal dealer commission that the oil companies pay to fuel pump owners, ends up approximately doubling the final price consumers pay.
Consequences
· Diesel is used to transport goods and commuters and therefore has a direct pass-through impact on retail inflation.
· When consumers end up facing higher fuel bills for using their petrol-powered two-wheelers or cars, and are also unsure of how the overall increase in the cost of living is going to impact their monthly budgets, they are likely to curtail non-essential consumption expenditure.
· Thus, even as inflation accelerates, consumer spending, a key driver of economic growth, could start to soften.
Options before government
· Given the extent to which Central and State taxes inflate the final fuel prices paid by consumers; the governments have the option of trimming excise duty and VAT, even if this would entail foregoing some revenue in the short-term.
· In the longer term, policymakers must look at more enduring structural solutions including ways to reduce the dependence on crude oil imports.
