Sunday, March 28, 2021

Increasing Price of Petroleum Products and Indian Economy

Previously the prices of petroleum products in India have hit the psychological levels of ₹ 100. However, later on, the prices have gone down slightly but these falls in the prices seem to be temporary considering the trend of the global crude oil prices. It must be noted that such unilateral increase in the prices of the petroleum products has a multifaceted negative impact on any economy and when in question is the Indian economy which is almost dependent on imports for the petroleum products and petroleum products are main fuels consumed by consumers and industry, the impact might be even bigger.

Price and Taxes

The prices of petroleum products in India are revised every day at 06:00 AM to adjust to the variations in the global crude oil prices. This way, the variations in the global crude oil prices are transmitted to the end users. The prices of petroleum products in India include the crude oil cost, refinery and processing cost (including freight and logistic costs), value added tax (VAT), excise duty, different cesses charged by the state and central governments, dealer commission and the margins of the oil marketing companies (OMC). As a result, the retail prices of the petroleum products are almost double of the global crude oil prices which the oil companies pay to the oil producing countries.

The rate of VAT varies from one state to another and because of it; the prices of petroleum products are different in different states. It should be noted that the VAT on the petroleum products is charged by the states and the custom duty is charged by the central government. The overall taxes (VAT and custom duty) charged by the governments are very high in comparison to many other countries in the world. Apart from the above domestic factors, there are many other global factors which also have an impact on the prices of the retail petroleum products in India. Those factors include the rupee to US dollar exchange rate, global demand and supply for the crude oil and the global price trend etc.

Impact of Increasing Fuel Price

The increasing prices of petroleum products in India will not only adversely affect the inflation (core as well as the consumer) in the economy but the governments’ revenues in the short to medium term also (Powell, 2020). It increases the vulnerability of middle and lower income groups (Dhanyashree & Gundimeda, 2020), negative impact on growth (Bhanumurthy, Das, & Bose, 2012) and escalate cost-push inflation in the economy (Sharma, Rishad, & Gupta, 2019). In any case, it will later manifest in the form of declining economic activities across all the sectors. Initially, though, its impact would be minimal but the way prices of petroleum products have been rising, other sectors of the economy will start having a pinch of this upward movement in the oil fuel prices (Upadhyay, 2021b). Even the Monetary Policy Committee has also raised concerns about the increasing inflation in the economy (RBI, 2021).

India is already facing a high risk of elevated inflation. In such a situation, further increase in the prices of petroleum products will certainly push the inflation upwardly in the economy from two sides. A look at the consumer price index (CPI) basket; it is clear that crude petroleum is a constituent of the CPI basket under two heads of fuel and light as well as transportation and communication . So any increase in the prices of the petroleum products is bound to directly push the inflation upwards (Upadhyay, 2021a). On the other hand, indirectly, the transportation cost is also largely dependent on the prices of the petroleum products. So an increase in the prices of petroleum products has a double impact on the consumer inflation and is a double edged sword which will cut from both sides. It has been predicted in many reports that the oil prices in the international market are expected to rise further in coming months. In such circumstances and if the composition of the pricing formula remains the same and taxes are not reduced significantly in coming months also, it is certain that inflation will elevate further and may breach the upward threshold limit.


There have been historical comparisons between the prices of petroleum products and gold. However, there is a relationship between the prices of gold and petroleum products but such comparisons are uncalled for and absurd at all. Gold is not an essential commodity for Indian economy and citizens but at present the petroleum products are not only essential but for many activities India is completely dependent on petroleum products. Also the gold is in any way not part of the CPI basket but the crude oil is. Crude oil has a double impact on the CPI with a combined weight of 15.43% of the total CPI basket (MOSPI, 2021).


Considering the shock caused by the nationwide lockdown, very high fiscal deficit of the union and state governments and increasing coronavirus infections caused by the second wave, India at this stage cannot afford to derail the economic recovery process just because of high inflation induced by very high petroleum prices in the economy. So it's high time for the central as well as the state governments to not only put aside the greed of collecting high revenues from the petroleum products and reduce the prices of petroleum products without wasting any time through coordinated efforts but also develop a mechanism that can ensure that prices of petrol products remain stable in a given band adjusting the custom duty and VAT in a proportionate way. For this the central government in consultation with the state governments can either set up a commission to come up with a workable formula or migrate to the Goods and Service Tax (GST) regime with a new GST slab for the petroleum products. At present the prices of the petroleum products can be brought down by reducing the excise duty and VAT simultaneously but this should be a temporary practice till a permanent mechanism is in place. Else, over time this greed of the governments would prove more counter-productive than increasing the tax revenues.


  • Bhanumurthy, N. R., Das, S., & Bose, S. (2012). Oil Price Shock, Pass-through Policy and its Impact on India. New Delhi: National Institute of Public Finance and Policy. 
  • Dhanyashree, B., & Gundimeda, H. (2020). Welfare impacts of transport fuel price changes on Indian households: An application of LA-AIDS model. Energy Policy.  
  • MOSPI. (2021, February). CPI. Retrieved from MOSPI:  
  • Powell, L. (2020, November 18). India’s tax revenue from petroleum products: Golden eggs that may kill the goose? Retrieved from Observer Research Foundation:  
  • RBI. (2021, February 5). Monetary Policy Statement February 3-5, 2021. Retrieved from RBI:  
  • Sharma, A., Rishad, A., & Gupta, S. (2019). Measuring the Impact of Oil Prices and Exchange Rate Shocks on Inflation: Evidence from India. Eurasian Journal of Business and Economics, 45-64.  
  • Upadhyay, R. K. (2021a, February 13). Growth to Drive the Monetary Policy in Indian Economy . Retrieved from The Deliberation:  
  • Upadhyay, R. K. (2021b, March 20). Rising Inflation Poses Risk to the Recovery in the Indian Economy. Retrieved from The Deliberation:
- Rajeev Kumar Upadhyay

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