A Bharat Petroleum retail fuel outlet in New Delhi. Photo: AFP / NurPhoto

As India battles the Covid-19 second wave, fuel prices are scaling new heights on account of hardening global crude prices and high taxes.

Since May 4, fuel prices have been hiked 21 times with the gasoline price rising by 4.96 rupees per liter and Diesel by 5.56 per liter. Interestingly, fuel prices had remained stagnant for 18 days from April 16 to May 3 during the run up to elections in four states and one union territory.

The current rise in prices is due to global crude oil prices topping $72 a barrel for the first time since 2019. India meets nearly 80% of its oil requirements through imports. Analysts say global crude oil demand is picking up because the uncertainties caused by the Covid-19 pandemic are receding in many parts of the world following swift vaccinations. They expect prices to remain above $70 in the near term.

While gasoline prices have crossed the 100-rupee mark in five states – Rajasthan, Madhya Pradesh, Maharashtra, Andhra Pradesh and Telangana – even the diesel price is now close to 100 rupees in Rajasthan. Fuel rates vary from state to state as the final price is dependent on state levies such as value added tax and transport costs.

Rajasthan charges the highest value added tax, followed by Madhya Pradesh, Maharashtra, Andhra Pradesh and Telangana. Among metro cities Mumbai was the first to cross the 100-rupee mark for gasoline.

Petroleum minister Dharmendra Pradhan said fuel prices are dependent on the global market, but he feels that bringing fuel under the ambit of the goods and services tax may ease the situation. However, the GST Council has to take a call on the issue, he added.

Economists are worried that high fuel prices will have a cascading effect on inflation. Diesel is used extensively by transport operators and farmers, so a price rise adversely impacts the costs of food and other essential commodities. The Reserve Bank of India Governor Shaktikanta Das had recently called for a reduction of taxes and other levies on fuel to keep inflation under control.

Out of the 100 rupees a liter for petrol, nearly 60 rupees goes as tax for the federal and state governments. As the recent lockdowns and other welfare measures to fight the Covid-19 have drained both the federal and state governments, they are reluctant to part with this income stream. Their usual sources of revenue from the goods and services tax, the corporate tax and income tax have decreased due to closure of business activities during the lockdowns.

The hardening of dollar is also another obstacle. Rating firm Fitch has forecast that the Indian rupee will average 75.50 to a dollar in 2021, up from 74.13 in 2020. A higher value of the dollar will force importers to pay more while buying crude oil.