Coordinated Efforts Needed to Reduce Petroleum Prices

This increase in oil prices has a multifaceted negative impact on the economy. It will not only adversely affect the inflation in the economy but the governments’ revenues in the medium to long term also by hurting the individuals’ capacity to spend (as a large portion of their income will be spent towards the oil component of the expenditure basket).

The increasing prices of petroleum products will elevate the inflation in the economy from two sides. It should be noted that crude petroleum is a constituent of the consumer price index (CPI) basket so any increase in the oil prices is bound to directly push the inflation upwards. On the other hand, indirectly, the transportation cost is dependent on the prices of the petroleum products. It has been predicted in many reports that the oil prices in the international market are expected to rise in coming months. Considering the situation, it is certain that inflation in coming months will elevate.

It's high time for the central as well as the state governments to not only reduce the prices of petroleum products without wasting any time through coordinated efforts but develop a mechanism that can ensure that prices of petrol products remain stable in a given band adjusting custom duties and VAT in proportionate way. At present this can be done by reducing the excise duty and VAT simultaneously but this should be a temporary practice till a mechanism is in place. Else, over time this greed of the governments would prove more counter-productive than increasing the tax revenues.

Rajeev Upadhyay

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