State-run oil marketing companies (OMCs) started increasing fuel prices since the first week of May after assembly elections concluded in four states and one union territory. Both petrol and diesel prices have been hiked by over Rs. 3 per litre each since May 4. At the moment, petrol is retailing over Rs.100 per litre in almost all districts across the country, while diesel rates are inching closer to Rs.100 in all major cities.
Experts are worried that the rising fuel prices during the second wave of the Covid-19 pandemic could worsen the economic recovery momentum and impact household incomes adversely.
Low on savings, high on spending
Higher petrol and diesel prices are likely to increase household spending, either directly or indirectly. The impact of fuel inflation is more visible in the urban economy, according to a SBI research report. “Higher urban inflation compared to rural inflation is mainly due to the difference in inflation in fuel and light, which is much higher in urban areas. This can be attributed to lower consumption of petrol and diesel in rural areas,” said the report.
It may be noted that fuel inflation rose in April to 7.76 per cent from 6.17 per cent in March. Even then, household incomes are likely to see a drop due to higher fuel prices, and it will have a direct impact on demand for discretionary items.
How spike in fuel prices impacts you
Those who own a personal vehicle are directly feeling the impact of rising petrol and diesel prices, and many households have been forced to either cut down on fuel consumption or reduce spending on other discretionary items.
Even people who do not own a personal vehicle are likely to spend more due to rising petrol and diesel prices. The higher spending will be due to increased commodity prices, surge in online delivery charges and public transport.
It may be noted that a rise in fuel prices directly impacts costs incurred towards essential goods that have to be transported over long distances. Even services like online deliveries — that are in high demand during the pandemic — cost more now due to higher fuel prices.
Why are fuel prices rising?
Fuel prices have been rising in the country since the beginning of the month as state-run oil marketing companies look to recover losses they incurred by keeping fuel prices static for almost two months before the assembly elections.
Another reason why OMCs are revising petrol and diesel prices aggressively is due to consolidation in global crude oil rates. However, global crude oil rates have been erratic over the past few weeks as there have been frequent ups and downs.
The main reason behind high fuel prices in the country are taxes levied on them by the Centre and state governments. India has one of the highest fuel taxes in the world, resulting in exorbitant petrol and diesel prices across the country.
While many appeals have been made to both Centre and state governments to reduce high taxes on fuel, it is unlikely that such a relief will be announced during the ongoing pandemic.