Petrol at Rs 100/litre and You!

For a country like ours, the prices of petrol and diesel can be a touchy subject. I am no economist but nevertheless, I just felt like addressing this burning topic about rising petrol-diesel prices and how it matters (or doesn’t) for common people like us.

So why are petrol and diesel prices rising in India? And making new all-time highs that not surprisingly (and unlike investors of stock markets), almost no one wants?

If you remember, the global crude oil prices had crashed as the world went into lockdown mode around March-April 2020. Now with its revenues coming to a standstill, the central government decided to raise the taxes and duties on fuel when crude oil prices were down. The increase in taxes kept petrol and diesel prices in India up even though crude oil prices had crashed.

I think I read somewhere that for every 1 rupee increase in excise duty, the government revenues increase by a solid Rs 12-15,000 crores! Not sure where I read this but I did. So it is obvious that an increase in duties/taxes on fuel is one easy way for the government to increase its revenues overnight.

During the lockdown days, even the state governments increased duties to boost their revenues as with everything closed, even they had no revenue sources left. So they had to do something.

With taxes and duties increased as a stop-gap arrangement to augment the revenues for governments during the lockdown, the result was that the share of taxes became 55-60% of the price of petrol and diesel in due course of time (and as of now).

Now with the global crude oil prices rising again (and with the already high taxes on retail fuel), the consumer-level retail prices of petrol and diesel are increasing in India.

As a result, in some parts of India, the retail petrol prices have crossed the psychological barrier of Rs 100 per litre. Of this, over 60% goes as excise duty and other taxes like VAT. So just 40% is the actual cost of the (crude) oil in what you eventually pay as a consumer of fuel. And that is what is mostly in news every day and being hotly debated.

That’s about what is happening.

But how does a fuel price hike (or high prices of fuel) impact you?

No its not just about the direct impact of how much fuel you might consume in your vehicles. Different people have different fuel consumption patterns. As depicted below:

Monthly petrol diesel consumption India

Suppose you consume 50-100 litres of petrol every month. A Rs 10 per litre hike will only impact you by Rs 500-1000 per month, which I think isn’t a big problem for most people reading this site. But such a price hike has a bearing on prices of other items as well as it will lead to a rise in transportation costs (as fuel is an intermediary product in the economic-chain that eventually delivers the product in the hands of the end consumer).

So it does matter after a while and beyond some threshold.

There are some talks about bringing petrol and diesel under the ambit of GST. I am no tax expert so I don’t exactly know whether fuel prices will dip under the GST regime or not. My guess is that it will bring some relief to the fuel prices. But I am not sure about the sustainability of such reliefs. But on the other hand, I am also certain of one thing. That if bringing it under GST’s purview does reduce the government’s revenue, it will find other ways to compensate for it. Isn’t it? That’s what people in power do. 😉

Remember that fuel taxation is a major revenue earner for the government. Any tinkering on this front that reduces the revenue will have to be compensated somehow. And the government will do it no doubt.

In general and beyond some threshold, when your fuel prices rise, so does the inflation. So from a personal finance perspective, it means that your investments have to work a bit harder to take care of higher inflation. It’s like the simple concept of higher inflation eating into your net investment returns. And don’t forget taxes. Even they eat into your returns! Everyone is hungry 😉

Your real returns will be a bit lower due to higher inflation (applicable to you). So that is again a pointer to pull up your socks and then, invest sufficiently in higher return assets like equity that are known to beat inflation consistently over the long term.

I know most of you already know all this. But just thought that will link it to the idea of how rising fuel prices highlight this aspect too.

Many feel angry paying so much taxes on fuel (and many other things) when it can be done away with (at least as per the common understanding). But remember that if taxes are reduced here, it means they will be increased elsewhere. And once again, unsuspecting common people like you and me will be paying it.

So instead of cribbing (and knowing that you really can’t do anything about fuel prices) what you can do is that you invest in a well-balanced investment portfolio that can give returns that beat inflation. That’s it. That is all you can and need to do.

If you have been investing randomly here and there with no clue how your financial goals will be met or how you are really doing financially, then you should get yourself a well-thought-out financial plan made by a SEBI-registered Investment Advisor. Do check the details of the Financial Planning Service that are on offer to ger yourself a customized financial plan.

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