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The Indian basket of crude is at about $78/bbl, an increase of about 20% since June. This period marks the phased resumption of normalisation after the second Covid wave.
Retail price of petrol in many cities breached the Rs 100/ litre mark a while ago and is set to get higher as the cost of the primary input, crude, is increasing. Consequently, there’s a call for a reduction in India’s high fuel taxes which is countered by both GoI and states as a step that would lead to revenue loss.
The revenue loss argument is overstated because it’s based on a half-baked approach.
Available data, such as the one by SBI that analyses mega trends by using credit card spending as the input, show that as fuel prices kept increasing, people began to switch their expenditure pattern by cutting down on groceries.
In the absence of a rise in incomes, expenditure switching is bound to happen as transport expenses are inflexible once normalisation is underway.
Therefore, what governments gain through fuel tax can be partially offset by a slowdown in the GST collection trend.
Also, given that in a country where over 80 out of 100 passenger vehicles sold are two wheelers, high fuel taxes have adverse distributional consequences in the current economic scenario.