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iasparliament
September 13, 2018
2 months
300
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In recent times, petrol and diesel prices in India have remained on a steady upward trajectory. Examine the causes that are fuelling such trend and discuss the consequences of it. What can the government do to ease the situation? (200 words)

Refer – The Hindu

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IAS Parliament 2 months

KEY POINTS

Causes

·         Dynamic pricing – In 2017, India’s state-run oil marketing companies switched to a dynamic pricing approach to set prices of petrol and diesel on a daily basis.

·         The move was aimed at helping ensure a market-driven approach to fuel pricing by enabling oil firms to factor in day-to-day fluctuations in crude oil prices as well as movements in the exchange rate of the U.S. dollar to the rupee.

·         As a result, with both crude oil and the dollar becoming significantly dearer over the last six months, petrol and diesel prices have remained on a steady upward trajectory countrywide.

·         Besides the cost of crude oil and the exchange rate, the incidence of Excise Duty (levied by the Centre) and VAT (charged by the respective States), along with a nominal dealer commission that the oil companies pay to fuel pump owners, ends up approximately doubling the final price consumers pay.

Consequences

·         Diesel is used to transport goods and commuters and therefore has a direct pass-through impact on retail inflation.

·         When consumers end up facing higher fuel bills for using their petrol-powered two-wheelers or cars, and are also unsure of how the overall increase in the cost of living is going to impact their monthly budgets, they are likely to curtail non-essential consumption expenditure.

·         Thus, even as inflation accelerates, consumer spending, a key driver of economic growth, could start to soften.

Options before government

·         Given the extent to which Central and State taxes inflate the final fuel prices paid by consumers; the governments have the option of trimming excise duty and VAT, even if this would entail foregoing some revenue in the short-term.

·         In the longer term, policymakers must look at more enduring structural solutions including ways to reduce the dependence on crude oil imports.

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