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Rising oil prices in India and its alternatives

By- Vishwajeet Raghuvanshi

India, the third largest economy in the world and second in terms of population is facing several
problems as its economic growth is continuing. Recently increasing prices of crude oil and
demand has been one of the main problems for government as the government is paying more
and import bill is increasing which is a real threat to inflation and CAD (current account
deficit). India imports 80% of its oil need and mainly from gulf countries like Iraq, Iran and
Saudi Arabia. In 2017 India spent $87.7 billion which is about 5.65 lakh crore for 220.43
million ton (MT) of crude oil and it is expected that for 2018-2019 demand would be around
227 MT. India is still a country largely dependent on crude oil for its economic development.
Increasing prices of petrol and diesel is hitting the public and question before us why despite
of having lower prices of crude oil people have to pay more and still price is increasing for
consumers.

Crude oil price which was $106 per barrel in July 2014 dropped to $26 per barrel in January
2016 while at the same time price were increasing for petroleum products. currently it is $66.94
per barrel. The prices of petrol and diesel should be half of what people are paying now but
because of large indirect tax regime people are paying double of the exact cost which they
would have paid if taxes had not been there. half of the tax amount goes to government and
remaining goes in the hand of oil companies. Excise duty hikes on petrol and diesel is also one
of main reason for increasing prices. Excise duty on petrol which was nearly 7.06% rose to
9.48 % just in one year and same with diesel where excise duty was hiked from 4.66% to
11.33% in just one year. Even during this period (2014-2016) crude oil prices were
$93.86(2014), $52.69(2015), $33.16(Jan 2016). It reached to its lowest in February 2016
where it cost $29.44 per barrel. Though the people are not getting benefit of decrease in oil
prices but there is also reason why government is not lowering down the prices. There is a
concept in economics that demand and supply are related to each other if there is more demand
than it is obvious that supply must be at the same ratio or of same as demand. In this case
demand of petroleum products are high in India and regarding consumption of petroleum
products India stand at second position after china and consumption is increasing rapidly
because of economic growth in India. While in fiscal year 2014 total consumption was 158.41
million metric tons it rose to 201.9 million metric tons in fiscal year 2018. An increase of nearly
43 million metric tons in 2 years. It shows that the demand of petroleum products is increasing
at a high rate. One more notable factor here is despite of increasing prices of oil, demand of
vehicles was increased by 10.13% from 2014 to 2015. This is mainly because of no alternative
option available in India as electric vehicles, bio fuel. In India almost, every family uses fuel
whether it is petrol, diesel, kerosene, natural gas on daily basis and since India’s population
largely consists of middle-class families who have limited income and other expenses as well
thus increasing prices is directly and indirectly affecting them and increasing price can be
justified in a situation where the government is providing alternative which is not happening
though. crisis of Venezuela is also one of the main reasons behind oil crisis and USA’s
sanctions on Iran is forcing India to look at other options. So, there are two possibilities that
either the situation will worsen or it will improve. Most probably prices of petrol and diesel
would increase at least for several years until government comes with some solutions. So, the
question on government’s intention on increasing fuel prices is justified and since the crude oil
prices are increasing again so what would be the government’s initiatives regarding that is
necessary for the people to know and understand. Though government has plan of replacing
current vehicles by electric vehicles by 2030. Even some basic foundation has been laid by the
government but that is not as such extent as it should be. Major Automobile companies have
shared same vision as government but infrastructure remains one of the major factors for
lagging behind in manufacturing electric vehicles in India. It is well known fact that for setup
of any long-standing industry vision and coherent action must be implemented which will
ensure that there is no disruption and policy is working smoothly and implementation of
policies is more important than making policies.

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