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Petrol and diesel price continue to rise.
Important News:
- Crude oil price rises to almost at $80 a barrel and raising concern.
- Why Fuel price continue to rise:
Pricing Approach: – Oil marketing companies have switched to dynamic pricing approach. This was done to adopt market driven approach to adjust exchange rate and crude oil rate fluctuation.
Tax and Duties: – Beside the cost of crude oil rate and exchange, Excise Duty and VAT (charged by the respective state) does not seem to be favorable.
Commission: – High commission which oil companies pay to fuel pump owner.
Dynamic Pricing: Also referred to as surge pricing, demand pricing, or time-based pricing is a pricing strategy in which businesses set flexible prices for products or service based on current market demands.In dynamic fuel pricing, retail selling prices of petrol and diesel will be revised daily.
- So far only two states Rajasthan and Andhra Pradesh have cut fuel taxes to control fuel price.
- Consequences of Fuel Price hike:
Impact on retail inflation affecting end consumers.
Curtailing Non-Essential consumption expenditure.
Softening of economic growth due to reduced consumer expenditure.
- What government can do to tackle situation:
Trimming excise duty and VAT
The Centre must direct oil marketing companies to change their pricing mechanism from trade parity price (TPP) to one based on market realities.
- The TPP is based on product prices in the international market, assuming that 80 percent of the petrol and diesel is imported and 20 per cent is exported.
- It is high time for oil marketing companies to start pricing their products independently and transparently based on market principles.
- So far Government/State has failed to take concrete steps against the fuel price hike because:
Fiscal Risk: – Risk of higher Fiscal deficit at a time when current account deficit is already soaring high.
Revenue Loss: – Petroleum products contributed 24 per cent of the Centre’s revenue receipts and 8 percent of the States’ revenue receipts.
Uncertainty over GST revenue.
- Future recommendations:
Centre must work with States to bring petrol and diesel under GST.
Lower costs and the benefit of input tax credit under GST could help oil companies reduce fuel prices in future.
