India Pushes up Cost of Fuel to Boost Revenues

India Pushes up the price of oil to boost revenue

Reprinted from the FT 26.06.2020

Oil companies increase pump prices for 19 consecutive days as new taxes imposed. Taxes on fuel have more than doubled since Narendra Modi came to power. Indian oil companies have raised fuel prices for 19 consecutive days as Narendra Modi’s government struggles to boost coffers depleted by the Covid-19 pandemic. After an almost 12-week price freeze imposed during the coronavirus lockdown, companies including Indian Oil Corporation have increased pump prices steadily.

On Thursday, diesel and petrol prices in New Delhi hit Rs79.92 and Rs80.02 a litre ($1.05 and $1.06) respectively, prompting the opposition Congress party to call for a nationwide protest next week.

The global oil price has risen recently but the cost at the pump has been driven higher by new taxes imposed by cash-strapped state and central governments. Taxes now account for more than 50 per cent of the final price Indian consumers are paying for fuel. Mr Modi’s government relies on petrol and diesel taxes as an important source of income and has more than doubled revenue from duties on fuel since coming into power in 2014. Recommended Indian politics & policy Delhi accused of under-reporting coronavirus deaths “Any boost to revenue will be more than welcome for the government. The revenue situation looks pretty bleak,” said Shilan Shah, senior India economist at Capital Economics in Singapore. “Obviously, the impact of the shutdown will cause tax revenues to plummet.”

Customers at a petrol station in New Delhi on Thursday were frustrated by the rise in prices. “It’s an unnecessary hike, the international crude price is so low, this is not the way to balance the budget,” said RK Sinha, a motorcycle driver who works in the aviation industry. “I think prices should be reduced.” Asia’s third-largest economy is on track to contract for the first time in more than 40 years after reporting growth rates of 6-7 per cent before the virus struck. The IMF revised down its 2021 growth outlook for India on Thursday, saying the economy would contract 4.5 per cent next year. The fund cited the disruption caused by India’s long lockdown, which triggered an exodus of migrant workers to their villages, as one of the reasons for the contraction.

The surge in coronavirus infections is frustrating India’s efforts to restart its economy. The nation of 1.37bn people has the fourth-highest number of coronavirus cases in the world and on Thursday 16,922 new cases were reported.

The government has limited room to inject direct stimulus into the economy, say analysts. In May, New Delhi launched a stimulus package, but the direct government expenditure was estimated to be less than 2 per cent of gross domestic product. “There has already been fiscal slippage,” said Shumita Deveshwar, director of India research at TS Lombard. “New Delhi is under severe pressure.”

Coronavirus business update. How is coronavirus taking its toll on markets, business, and our everyday lives and workplaces? The coronavirus pandemic has inflicted further damage on consumer spending, with unemployment rising during the lockdown, according to the Centre for Monitoring Indian Economy. “Consumer demand is already on the decline,” said Ms Deveshwar. “This is going to hurt pockets even more.” While demand remains subdued, policymakers are doing what they can to offset lower tax collections, said Parul Chopra at Rystad Energy, speaking from Bangalore. “This is one of the easier and cleaner ways to shore up some more money across the spectrum of society,” said Mr Chopra, “whether it is rich or poor, everyone is going to use petrol.”