Petrol price: Why India’s economy needs cheaper petrol, diesel

2021-02-24 07:28:41

NEW DELHI: Fuel prices went up again on Tuesday after a two-day pause. Petrol and diesel prices have been raised by over Rs 7 a litre this year.
This has pushed petrol price to the highest level in Southeast Asia and past the Rs 100-mark in some places in India.
About 60% of the petrol price and 54% of diesel is made of state and central taxes.

The Centre has refused to cut excise duty it had cumulatively raised by Rs 13 a litre on petrol and Rs 16 on diesel last year, but states have taken the lead with tax cuts to offer relief to consumers.

Wall Street brokerage Bank of America Securities said in a note on Tuesday that a 10% spike in oil prices can push up retail inflation by 0.23%, badly hurting consumption at a time when the economy is just about recovering.

While a $10 a barrel increase in crude prices reduces consumption by 0.4% of GDP, oil tax cut to reduce prices by Rs 10 a litre impacts the fiscal deficit by only 0.6% of GDP, it added.
The report further said if crude continues to average at over $60 a barrel, the government should cut customs duty on crude.
The resultant revenue loss can be funded by higher open market operations (regulating money supply by buying and selling securities) by the central bank because higher oil imports can cut forex intervention, leading to savings of $9 billion on current account deficit if crude drops by $10 a barrel.

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