Soaring prices at the pump threaten recovery and inflation in India

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Indian pump prices are in uncharted territory as ever-increasing government levies coincide with the recovery of crude from the depths of the Covid-19 pandemic.

Fuel costs have been brought down to current levels by the combined effects of higher benchmark Brent prices and numerous tax increases in recent years. Record-breaking gasoline and diesel prices are leaving some Indian car owners unable to afford the cost of using their vehicles and prompting the country’s transportation industry to strive for change.

Buying gasoline in major Indian cities such as Mumbai costs almost twice as much as in New York, casting a shadow over the recovery of Asia’s second-largest oil consumer as virus-related movement restrictions are relaxed. The federal government continued to raise taxes last year even as it put the country into nationwide lockdown and global crude prices plummeted.

Gasoline costs in Mumbai have increased by more than 25% in the past three years, while diesel prices have increased by a third during the same period, according to data from Indian Oil Corp. Indian economy in the midst of a large rally in commodities.


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The biggest pilots

In the Indian capital of New Delhi, gasoline prices have jumped nearly 20% since the start of the year, alongside a similar rise in diesel costs. Federal taxes on gasoline, which fuel scooters and motorcycles, have more than tripled in the past seven years. Those running on diesel, the country’s most widely used fuel, have inflated seven times over the same period.

Soaring prices at the pump threaten recovery and inflation in India

Rising prices are hitting the country’s burgeoning middle class, which has been driving India’s economic growth and demand for oil in recent times. Rahul Srivastava, a 48-year-old former executive at an advertising agency in New Delhi, switched to a brand new sedan just a month before the country entered nationwide lockdown last year. Now he is considering selling his vehicle.

“Driving the car is now a luxury for me,” said Srivastava, who turned to stock trading after losing his job and now earns about a fifth of what he did before. “I used to fill up whenever I needed to fill up and it cost me 3,000 rupees ($ 40). Last time filling less than half the car’s fuel tank cost me over $ 25. I now only drive when absolutely necessary.

Unfortunately for Srivastava, truck drivers and millions of others, India’s budget deficit hit a record high last year, and fuel taxes represent a reliable source of revenue that the government has struggled with. to ignore.

Taxes erode disposable income and fuel inflationary pressures, according to ICRA Ltd., the local unit of Moody’s Investors Service. “Certainly, the high prices will have an impact on growth and the return to normalcy,” said Prashant Vasisht, vice president of ICRA. “Prices above a particular level are pinching and people are traveling less and trying to save on the cost of fuel.”

Impact on demand

As the Indian economy is recovering from a 7.3% contraction in gross domestic product in the year through March, millions of people remain under pressure. Unemployment continues to rise, and the Pew Research Center estimates that the country’s middle class shrank by 32 million people in 2020.

“High prices are having an impact on the demand for fuel,” said Senthil Kumaran, South Asia oil manager at FGE. “But, at this stage, the price effect will be less important because the country is still coming out of the blockades of the second wave. The pent-up demand will outperform high retail prices, so it will not pause the recovery in demand. But if the high prices continue until July, it will have a bigger impact. “

With soaring fuel prices, Indian truckers have had enough. Drivers have a limited ability to pass on higher prices, which accounts for about 70% of the cost of operating a truck, according to the All India Motor Transport Congress, which represents more than 14 million truckers and bus operators. and tourist vehicles.

“Record-breaking diesel and gasoline levels have impacted the livelihoods of millions of small transport operators and workers, who are struggling to make ends meet,” said Kultaran Singh Atwal, chairman of the ‘AIMTC. The group intends to hold a nationwide protest this week, and follow that with a general strike if the government doesn’t cut fuel prices, he said.

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