Fuel price...

But the Opposition launched a fresh offensive on the government over the hike in fuel prices.

Congress leader and former finance minister P Chidambaram tweeted, “Relentless rise in prices of petrol and diesel is not inevitable. Because, the price is built up by excessive taxes on petrol and diesel. If taxes are cut, prices will decline significantly.”

“Congress demands that petrol and diesel be brought under GST immediately,” he said.

CPI(M) politburo member Md Salim said, “The BJP had promised to cool down petrol and diesel prices in its manifesto but now they are trying to justify the steep, record-breaking prices of petro-products.”

Telugu Desam Party president and Andhra Pradesh chief minister N Chandrababu Naidu, an ally-turned-rival of the BJP, asked, “The value of rupee is falling down rapidly with every passing day. I am not surprised if it touches Rs 100 per dollar in the coming days. The prices of petrol and diesel are shooting up steeply and very soon, the price of petrol might touch Rs 100 per litre. Where are we heading to?”

To be sure, the current phase of increase in petrol-diesel prices is not unprecedented. An HT analysis of petrol and diesel prices in Delhi from 2002 onwards shows that there are instances of a much bigger rise in petrol-diesel prices in the past.

Petrol and diesel prices increased by 18% and 23.5% and 26.2% and 33.3% in 2009-10 and 2002-03 respectively. However, there are certain aspects which make the current phase of petroldiesel price hike unique.

Officials said the spike in rates was on account of the exchange rate falling to a record Rs 71 against the US dollar, depreciating by Rs 2.5 in a month.

Rupee closed at 71.21 to the dollar after touching a record low of 71.25 on Monday. The recent slump has lifted the import cost of crude oil, subsequently raising fuel prices.

Also, crude oil has gained $7 a barrel in a fortnight, driven by fears that the US sanctions on Iran will likely contract supplies. The appreciation of dollar against rupee also pushed up rates for compressed natural gas (CNG) as well as piped natural gas (PNG) since the price of gas procured by city distributors was mostly dollar-denominated.

Indraprastha Gas Ltd, which retails gas in the national capital, raised on Sunday the prices of CNG by 63 paise per kg and by Rs 1.11 per standard cubic meter for piped natural gas supplied to households for cooking purposes.

Petrol and diesel prices have already increased by 7.4% and 10.2% between April 1, 2018 and September 3, 2018. If the current trend continues, both petrol and diesel prices will have a double digit price growth in the current fiscal year. If this happens, it will be the first time since 2002-03 that the country will have experienced double digit inflation in petrol-diesel prices for three years in a row.

Also, there was a significant difference in price trajectories of petrol and diesel before the present government assumed office in 2014.

This was because diesel prices were not completely deregulated and hence more immune to oil price movements. For example, even though petrol prices increased by 21.8% in 2010-11, diesel prices actually went down. While this was not always the case, the government had an option to provide a cushion against rise in diesel prices. Given the importance of diesel in the transport industry, this could be used as a policy instrument to contain the general inflationary impact of petroleum price hike. With deregulation of diesel prices in 2014, no such option exists anymore.

In fact, diesel prices have grown at a faster rate than petrol prices in the last three years. This means that the current phase of rising petroleum prices is likely to lead to a bigger spill over on the headline inflation numbers.

“It needs to be kept in mind that the effect of rise in international oil prices is not restricted to petrol and diesel prices alone, as even petrochemicals have a widespread use in the economy,” said Himanshu (one name), an associate professor of economics at Jawaharlal Nehru University.

Without a reduction in petroleum taxes, which can complicate an already strained fiscal situation, inflationary pressures from rising oil prices will be difficult to douse, he added.

Taxes account for between 37% and 47% of the retail price of fuel and dealer commissions between 3.8% and 4.8%. For every rupee cut in excise duty on petrol and diesel, there is a ₹13,000-₹14,000 crore hit to the exchequer.

(With agency inputs)