THE second wave of COVID-19 infections is abating in India. Hopefully, the agony of April and May 2021 will be just a horrific memory.
As the second wave abates, various state governments have begun announcing unlock measures. These unlock measures are aimed at reviving the economic activity across the nation and more importantly send out a message that it is back to business in Asia’s third largest economy.
A storm is brewing
But a storm is brewing as the Indian unlock process gets underway. Global crude prices, particularly of Brent crude, have crossed the $70/barrel mark.
What is worse, traders have already begun writing crude oil options with strike price of $100/barrel. Most oil traders have turned bullish about demand. And the reason isn’t difficult to fathom.
Firing on all cylinders
Crude oil traders are have set their eyes on the three biggest consumers – United States of America, People’s Republic of China and India in that order.
Collectively, these three nations account for nearly 38% of the global crude oil consumption. India’s crude oil consumption is pegged at 4.7% of the global offtake.
All the three nations (barring any unforeseen circumstances) are expected to see their economies chugging along well in the remainder of the current calendar year.
And that partly explains why Brent crude price has shot past the $70/barrel mark. It is also bad news for India which has to import nearly 80% of its annul requirement.
Indian crude closing in
The Indian crude basket is not dependent on Brent crude prices, but is certainly influenced by it.
As we speak, the Indian crude oil basket is trading around $69.79/barrel and it looks imminently certain that the $70/barrel level would be crossed in the days to come.
Indian consumer isn’t spared of the burden
With both petrol and diesel prices being market linked, there is absolutely no relief for the Indian consumer. As diesel is the preferred fuel used by road transporters who ferry goods, rising price of diesel can stoke inflation.
|Year/Month||Global price ($ per barrel)||Petrol price in India (₹ per litre)|
(Prices in Mumbai)
The above chart alone explains how the Indian prices have moved over the last 12 years. Picture this, a month ago in Mumbai, one litre of petrol would have cost ₹96.96 but is currently ₹101.82.
And mind you, this is happening at a time when the demand for fuel actually nosedived in India on the back of the second wave of COVID-19 infections which saw mobility restrictions being put in place!
Excise and dose of VAT
The secret lies in how both the Union government and the state governments have resorted to taxing the common man for every litre of fuel consumed.
As per a report in the Times of India, the central excise collected per litre of fuel has gone from 14% in May 2014 to 36% in May 2021. At the same time, the tax collected by a state has gone up from 17% to 23% in the same period. On the other hand, the fuel dealer’s commission has increased to 4% from 3%.
But the fall in demand during the last two months has left many states slightly chastised. One estimate indicates that in Rajasthan alone, the daily loss to the state government is pegged at ₹17 crore!
Meanwhile the suffering public have been demanding that both petrol and diesel should be brought under the ambit of the Goods & Services Tax or GST. But as the value added tax or VAT rate differs from state to state, identifying a revenue neutral rate or RNR is difficult. It is often said that the RNR for fuel could be around 100%, making the whole exercise completely futile and anti-consumer