Petrol Price Hike: What’s the impact on the common man’s life?

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Petrol Hike: What’s the impact on the common man’s life?
On the eve of UPA government completing 3 years in power in its current term, it gave the country a jolt; The state owned oil marketing companies increased petrol prices by a record Rs.7.5. Petrol prices went up to INR78.57 to create a historic high on the 23rd of May. While RBI is still battling rising inflation, it now has the tough task of managing inflation in the light of increased petrol prices. This has obviously sent shockwaves to the common man who is trying hard to make ends meet in an inflationary environment.

Is the Indian consumer the only one facing a price rise?

As evident from the table below, the price of petrol has risen over the period of five years in different countries. India’s petrol price has grown over by 60% during the past 5 years. If the turmoil in the Middle East continues and the rupee falls unabated, this price rise will continue. For the common man every rise in petrol prices could sound the death knell for his savings.

Country and Currency 2007 2012 % increase
India (INR) 48.38 78.57 62.40181893
USA (US$) 0.87 1.02 17.98780488
Russia (Rubel) 16.79 25.41 51.34008338
China (Yuan) 4.94 8.33 68.62348178
Japan (Yen) 136.7 149.4 9.290416971
Brazil (Real) 1.54175 1.51468 -1.755796984
Germany (Euro) 1.394 1.631 17.00143472
UK (Pound) 1.40197 1.68137 19.92909977

How much are we Paying Extra?
Now let’s see how much extra we do have to shell out due to this increase in petrol prices. To measure the impact, I used my own personal example. I use a bike to commute to my office, so the first thing that came across my mind is how much I have to shell out extra for this price hike.

Usage Liters Petrol Prices before hike (RS 70.66) Petrol Prices after hike (Rs 78.16) Extra Cost that you have to pay
Consumption per day 1.5 105.99 117.24 11.25
Consumption per Month 45 3179.7 3517.2 337.5
Consumption per year 540 38156.4 42206.4 4050
By looking at the above illustration one can easily start to feel the pinch. On a yearly basis I have to pay INR 4050 more. This amount may seem to be a miniscule amount but it is actually not so.

Have you ever wondered how much do you actually save after paying income tax, wealth tax, service tax, water tax, tax on house property and etc. So this INR 4050 is an additional burden for me that I have to pay.

I need 1.5 liters of petrol on a daily basis whether I go to work or for some leisure trips. So I have taken 1.5 liters as the average use.

By looking at the above illustration one can easily start to feel the pinch. On a yearly basis I have to pay INR 4050 more. This amount may seem to be a miniscule amount but it is actually not so.

Have you ever wondered how much do you actually save after paying income tax, wealth tax, service tax, water tax, tax on house property and etc. So this INR 4050 is an additional burden for me that I have to pay.

Inflation: Adding Woes to Misery
Inflation has also surged during the past 8 years. This fuel price rise coupled with an increased rate of inflation has surely impacted your pockets. Inflation rate has never gone below the 4% mark since January 2006 which remains a major cause of concern.

To read more on Inflation and how it is affecting your investments, click the following link: Inflation Effect: Are You Getting Enough Returns?

But are we ready to face the issues of slowing down of economy, high inflation rates and continuous price rises? I hardly doubt. We Indians know how to save our money but we don’t know how to multiply it, and in today’s uncertain market conditions, only a mere savings from the bank deposits and insurance won’t suffice much.

Common Investment Instruments
Most of us save our hard earned money in safer investment instrument like bank deposits and savings account and buy one-two life insurances and we tend to think that is enough. But, what we don’t realize is that investing in these instruments won’t help to grow our money.
Savings account is the most common avenue and almost everyone deposits their money in it. But does it really help you to multiply your money? Forget about multiplication it doesn’t even add value to your money. Your savings account offers you 3-4% returns which is less than the inflation rate, which is currently at 7%. So one can easily see that savings account is decreasing the growth rate of money by 3%.
Same thing applies to your bank deposits too. The banks may be offering you lucrative interest rates of 8-8.50%, but when you compare with the inflation rates, you are only getting 1-1.5% more. Separately, you have to pay taxes on the interest income so that reduces your return to quite some extent.
In case of life insurances, people tend to confuse them with investment instruments. Life insurance is something which insures your life against the odds. Stop thinking this to be one of your investment instruments and treat them as a protection measure. Separately, the returns are quite low when compared with returns of other asset classes.

Impact of this Price Hike
Let us quickly glance through what can be the negative consequences for this price rise and how it can affect us.

  • Inflation figure is bound to go up and with it price of goods and services are also expected to go up.
  • Major sector to get affected is transportation, textiles, Auto, FMCG etc, as all of these major sectors requires petrol and other fuels to manufacture and transport them
  • When transportation costs rises, prices of essential commodities also gets increased, which are transported on a daily basis
  • Banking sector is also expected to suffer due to high inflation level.
  • In order to control inflation, the RBI has to implement strict monetary policy that will directly affect the banks.

Word of Advice
It’s high time you do your financial planning and invest in some other asset classes which have the potential to outperform the inflation rate and also keep up with the price rise.
Our expenses increase every year, be it for household purposes, branded goods or tuition fees for children. Considering the price index data for last several years, a simple fixed return will not be sufficient to supersede the effect of inflation and counter the effect of price rise.
Now let us see how we can minimise the effect of the latest petrol price hike. INR 50000 invested into the savings bank account will fetch me 2000 extra on a yearly basis taking the interest rate as 4%. And if I invest the same amount into any liquid funds, which is currently giving me a return of 9-9.5%, I can get as much as INR 4500 as interest on a yearly basis.

Chart 1: Showing maturity amount of savings bank account and liquid fund
So this extra amount of money will certainly help me out to pay for my fuel expenses. Liquid funds invest into the various money market instruments and can be easily redeemed within a short span of time, which makes them one of the most liquid financial instruments currently available.

    CAGR
Scheme Name Latest Date 1 Year
Category: Liquid    
Axis Liquid-Inst(G) 30-May-12 9.6899
Baroda Pioneer Liquid-Reg(G) 30-May-12 9.7144
Birla SL Cash Plus-Ret(G) 30-May-12 9.0617
BNP Paribas Overnight Fund(G) 30-May-12 9.0987
Daiwa Liquid-Reg(G) 30-May-12 9.6239
DSPBR Liquidity-Reg(G) 30-May-12 9.4544
HDFC Cash Mgmt-Savings(G) 30-May-12 9.6201
HDFC Liquid-Ret(G) 30-May-12 9.5427
IDBI Liquid Fund(G) 30-May-12 9.7023

Table 3: Showing returns of select few liquid funds
From our Prime minister to Finance minister, everyone keeps on saying that GDP will grow. I don’t know whether the actual GDP will increase immediately, but for the time being, price of Gas, Diesel and Petrol has increased.

Author: Debanjan Guha Thakurta, Analyst, Fundsupermart.com

This article is for information purpose only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products /investment products mentioned in this article or an attempt to influence the opinion or behavior of the investors /recipients. Any use of the information /any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.

Read more about: rbi, petrol price, inflation
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