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Why has there been the present rise in fuel inflation in India ?

Year on year inflation rate %

Fuel and power which has a weight of 13 % in total WPI ( wholesale price inflation) dwindled by 2.05 % cagr ( compound annual rate of growth) from 2013 to 2020. The yoy( year on year) fuel inflation increased to 37 % in May 2021 and month rate increased by 5 -15 % from November 2020.

Petrol price has declined by 6.69% Cagr from 2013 to 2020. In 2021, price has risen by 5 – 62% year on year from February to May. Month on month price has risen by 5 – 15% from November 2020. Hence the high price.

Similarly diesel has declined by 6% from 2013 to 2020. Like petrol, diesel too has risen by 3 – 66% yoy from February to May in 2021 and sequentially month by 5 – 15% from November 2020. Hence the high price.

Low base effect is working in these prices. In 2020 yoy inflation of fuel items had been negative.

Global oil prices have risen from February 2021 to $ 71 per barrel in the current times after OPEC withdrew supply cuts and rising demand that the world witnessed since last quarter of 2020.

India imports 82 % of oil from others and local petroleum products market prices are linked to global prices of crude oil on a daily method and subject to high tax rates – excise and state VAT to the tune of about 54 %. Also freight charges and dealers commission are added to the base price as shown in the table below for diesel.

So daily fuel prices have been rising steadily since February 2021.

This has led to high WPI inflation of about 12 % in June 2021.
Tax revenues from fuel have added to the government ‘ s earning in these times of sops. Oil marketing companies also would be in the red if fuel prices are low. Thus the debate for replacing present fuel taxes by GST is thus defended.

So forecast of fuel price in India would depend on global oil price and how often government raises local fuel price as well as demand growth in the economy. My estimate is oil price would be range bound at present levels as 2 opposite forces of high base effect and recovery in global demand would be at play from 2022.
But if global oil prices escalate continuously, local oil prices too would zoom and result in a precarious situation. The alternative then would be government policies and switching to alternative fuels such as gas, biofuels and electricity.

Month on month inflation rate %



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Disclaimer

Views expressed above are the author’s own.



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