How Rising Petrol Prices Will Impact the Indian Economy?

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lekhaka-Kavinkal Satyanarayan

By Kavinkal Satyanarayan

Updated: Sunday, May 13, 2018, 14:41 [IST]

While tabling the Economic Survey 2018 report in the parliament the Finance Minister made a pointed reference to the rising petrol prices and its impact on the economy. The survey claimed that a price rise of $10 per barrel of crude will cause inflation in the country to the tune of 1.7%, GDP Growth would depress by 0.2-0.3% and the additional burden on the Current Account Deficit would about $9-$10 billion.

The IMF projections for crude price rise averages about $12 per barrel over 2018-19. All of which augurs ill for the world’s fastest growing economy. Such challenges are not new to the government.We have already tested CAD at a whopping 3.9% GDP and survived. So, the real challenge posed to the government by the rising crude prices is to protect the growth path on which this country has ventured.

Macroeconomics are fine, but economics is about the reality as experienced by citizens and domestic households. Rising petrol prices impact house hold expenditure in two ways. First is in the increased cost of petrol for our cars and two wheelers.

This is clearly visible to us at the petrol pumps in the digital money counter where the spinning numbers which were once visible are now just a blur. The final figure: never seen before. The second is the additional cost of goods and services which comes from bulk consumers of petroleum products passing down the price hike to customers. These constitute more than 65% of crude oil consumers in India. Since petrol is only a fraction of cost input for them, the net effect on price is not substantial. Which is why a 20% hike in cost of a barrel leads to about 2% increase in inflation.

A peculiar truism about petrol is that its demand is insensitive to cost. Increase in price does not reduce demand substantially. It is very unlikely that we will switch from two wheelers to public transport just because of a price hike. Knowing this the stakeholders set a comfort level for petrol price, presently at Rs80 a liter. While this level is tested the price is allowed to linger for a time to enable people to be accustomed, before a new normal is found. A Rs100 per liter petrol is beginning to appear in the horizon.

The taxation on petrol leads to a disproportionate burden on the middle class. Take an urban professional drawing Rs30,000 a month. He commutes 100km a day to work. His monthly fuel bill with an efficient two-wheeler would be more than Rs12,000 a month @ Rs 80 a litre petrol, half of which is in taxes. He suffers TDS amounting to Rs5,500 annually. Add to this the petrol tax burden and what he pays is more than Rs77,500 in taxes annually. He is effectively pushed from 5% to 20% tax bracket due to petrol prices alone. This in a country that practices progressive taxation.

True that this story needs to be qualified. He probably stays with his brother, who takes care of the fuel bill. He probably car pools his motorcycle, sharing the burden with his buddy. But this is no thanks to the State, that is middle class ingenuity that gives him the strength not to throw it all away in despair. Rising petrol prices deepen disparity that is very high in India.

We do need to look at alternatives. Corporate perquisites deserve a tax category of their own with no concessions. It is about time rich farmers started paying up. Inheritance tax at Rs 1 crore base ceiling is warranted. IT exemptions above a certain level need to go. And above all the system needs to be fixed to make it more accountable and efficient.

The government has a perverse incentive to maintain status quo. Rising petrol prices give windfall revenues due to proportionate increase in tax component. This needs to change. There are alternatives to compensate fall in petrol price revenues to the state. Civil activism needs to push for policy changes. Alternatives like efficient public transportation, electrification, not only of cars but also bulk transportation, deserve to be incentivised. India really needs to break out of the petrol price rise conundrum before it begins to hurt.

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