The prices of petrol and diesel are threatening to hit an all-time high as international crude prices have risen above $70 a barrel and continue to rise. But fuel prices in India cannot be attributed only to rising international prices. After all, retail prices have remained at pretty much above Rs 70 a litre for petrol and around Rs 60 a litre for diesel across Indian cities even through the nearly four years of the Narendra Modi government when international prices were, for the most part, at their lowest. If retail prices were indeed determined by the market as the nation was promised when fuel prices were deregulated, they should have been half as much as we have paid for every litre in these four years. Consumers in India pay the highest retail prices for petrol and diesel among South Asian countries as taxes account for about 40-50% of the price at the petrol pump. The Modi government has kept fuel prices high through excessive taxation. That may have helped oil marketing companies wipe out losses from the era of subsidies and the government to shore up its fiscal position, but it was all at the cost of the common man, who suffered, and the economy, as demand dropped.

But the worst may be yet to come. Experts say India’s fuel demand is set to double this year – from 93,000 barrels a day to 190,000 barrels.

This will increase imports, on which India relies for 80% of its fuel needs. If global prices continue to rise, New Delhi will have to rework both the fiscal and current account deficit math. The second whammy will be a cascading effect on prices of essential commodities. Costlier fuel directly affects inflation, which is already on an uptrend. Higher inflation will cue the central bank to increase interest rates. That, in turn, will douse all hopes of spurring economic growth.

The crude price spiral has prompted the petroleum ministry to demand a cut in the excise duty on petrol and diesel in the upcoming Budget. It has also sought inclusion of petrol, diesel, jet fuel and natural gas under the ambit of GST. This confronts Finance Minister Arun Jaitley with a difficult choice. The government must lower existing fuel taxes, or better still bring it under the GST regime and cap the taxes. But doing either will mean a massive loss of revenue at a time when the government’s management of the fiscal deficit is already under strain. Yet, not doing so will hurt people and the economy more widely and deeply. Mobility of goods and people is key to the economy. Therefore, fuel prices must be kept at the lowest level possible.

via Fuel taxes hurting people, economy