Question

why are the fuel rate increase rapidly in india?

Answer 1

1. It is not over yet. The excise duty is the only buffer that the government has against oil prices. Since petrol rates have become market determined oil companies will pass on whatever the increase in the crude prices to buyers in the form of rate hikes. (They may delay it by a few days at the behest of the government, but a hike is inevitable). In 2013 government started subsidising fuel prices once they crossed $100 and they went up all the way to $150 throwing the country’s budget out of whack.

2. It is not just car owners paying for more petrol. Every $10 per barrel increase in oil price will increase import bill by around $8 billion according to SBI research. This will increase current account deficit by 27 bps (0.27%) and lead to depreciation of the rupee. A weaker rupee will lead to higher generalised inflation. So the government spending more on importing petrol means the poor being hit by higher inflation. There has to be a shift to alternate fuel if prices cross a certain level. This cannot happen overnight but needs incentives like tax cuts on green fuel and tax hikes on petrol.

3. The Indian economy is still not out of the woods yet. The government needs all the resources it can lay its hands on to continue spending in public infrastructure and addressing the problem of bad loans in banks which is reaching crisis proportions. At such point of time reducing government revenues to provide cheap petrol for 5% of the population (for 100cc bikes the impact is marginal)