The Fuel Price Conundrum in India

Fuel prices have always been a bone of contention in India. The problem with the fuel prices is that for the government they represent the cash cow. The state, as well as the central government, derives a considerable chunk of its revenue from increasing fuel prices.

Increased fuel price is a common reason of political bickering in India with each party blaming the other for the increment. However, in reality, the rising fuel prices are a socialist scheme designed to transfer wealth to the poorest households in the nation.

In this article, we will have a closer look at the economics behind the rising fuel prices in India.

Why Rising Fuel Prices are a Problem?

The Indian population is frustrated with the rising fuel prices in the nation. This is because, over the past five years, the crude prices in the international market have halved. Hence, technically the fuel rates in India should also have gone down drastically. However, there has been no effect on the fuel prices in the nation. They continue to remain prohibitively high. Also, the cost of fuel in neighboring regions like Pakistan and Nepal are very low.

Indian companies supply fuel to landlocked Bhutan, yet the same fuel is sold for almost 35% less in Bhutan. The primary reason behind the sky-high fuel prices is the taxation. Fuel is taxed at three levels by the local, state as well as the national government. The end result is that the taxes on fuel add to up to more than 100% of the fuel cost!

Fuel Prices Tax The Rich

The rise in fuel prices in India does not really impact the vast majority of the population. This is the reason why there is no real political incentive for any party to bring down the prices. We need to have a closer look at who consumes fuel to get a clearer picture:

  • Indians do not have a high percentage of vehicle ownership. Only the top 4% of the Indian population own a four-wheeler. Also, only the top 15% of the people in the country own a two-wheeler.

    Hence, vehicle ownership is not a reality for more than 85% of all Indians. Since, the majority of the lower class does not have a vehicle they are not really impacted by the increasing fuel rates. The two-wheeler owners also face a minor impact. This is because the mileage given by these bikes is so high that a small increment in fuel prices does not really bother them.

    The major losers of the fuel price hike are the four-wheeler owners. According to the government, this is an elite club.

    The government has no qualms in taxing the top 5% at higher rates. This seems to be in line with the socialist philosophy of progressive taxation that is followed by the majority of Indians

  • Another argument against the rising fuel prices is that it creates inflation by leading to an increase in the food prices. However, that is not the reality. This is because on an average transportation costs less than 15% of the cost of any food product. Also, not all food is transported by road. Less than half of the food products are transported by road. Others are transported using railway which uses biofuels.

    Hence, on an average, fuel costs contribute to about 5% of the total food costs.

    An increment in 20% just means that the fuel cost will rise by one percentage point. This isn’t really earth-shattering and shouldn’t really drive the food prices too high.

    The rising fuel prices are often used by the middlemen to increase the price of food products in India. However, the middlemen are now being eliminated. As a result, even though the fuel prices have gone to historic highs, there has been very little impact on the food prices.

  • Another major class of consumer of fuel products is the people who use generators to power their homes and work establishments. Once again, they fall into the category of the top 5% income earners and their financial well-being is not really a priority for the government.

Fuel Revenue is Used for Subsidies

The revenue generated by taxing fuel at sky-high prices is used to fund several schemes for the poor. One of these schemes is the Food Subsidy scheme. Under this scheme, the government guarantees that they will provide food products for cheap to over two-thirds of the population of India. This scheme is wildly popular and generates a lot of votes for the government. It is unlikely that the government will reduce the allocation of funds to this scheme.

Also, the government uses the money earned from selling fuel to subsidize the distribution of LPG to homes which have the lowest incomes. Like the food security scheme, this scheme too benefits the majority of the people and is unlikely to be recalled.

The bottom line is that high fuel prices are a form of socialism. Their economic benefits are not easy to discern. However, since these schemes help keep politicians in power, they are likely to continue. Meanwhile, the average Indian middle class needs to get used to sky-high fuel prices.

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