EFFECT OF OIL PRICES ON INDIAN ECONOMY


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INTRODUCTION


India is one of the largest importers of crude oil, with 80 % of its fuel needs being met with imports. The heavy reliance on imports has continued to grow with the increasing energy needs of the country which is one of the reasons behind the hike in oil prices.

Rising oil prices are a major economic concern for our country and have often been used by opposition political parties to defame the government.

Thus there is a need for solutions to tackle the heavy reliance on imported crude oil to shield the country from a higher fiscal deficit and currency fluctuations.

Moreover, we recently witnessed record-high fuel prices just after the primary lockdown, and it’s important to determine the reasons for this.

LITERATURE


Fuel is made by the refineries using crude oil as the raw material. India imports over 80% of its crude oil requirements, over 60% of which comes from the Middle Eastern countries. So, our fuel prices are directly linked to the global Crude oil prices (Measured as dollars per brent crude barrel). On top of this, 60% of the total retail selling price accounts for the taxes levied by the state and central government. So, these two are the key factors affecting the fuel price.

OBJECTIVES OF STUDY


This term paper aims to study:


What affects the oil prices across the country?

What are the various factors responsible for high fuel prices after lockdown? What is the impact of high oil prices on Indians and the Indian economy?

How to deal with high oil prices?

FACTORS AFFECTING CRUDE OIL PRICES

  1. PRODUCTION: In general, if oil-exporting countries increase the supply or production of crude oil, the price generally falls. Saudi Arabia, a key oil-producing country, has reduced its daily output by one million barrels through February and March 2021 so that it can boost oil prices(which eventually happened).

  2. DEMAND: The law of demand says that if the demand for crude oil decreases so the price also decreases in the global market.

  3. INVENTORY: A country cannot import crude products more than some specific amount just because of inventory cost.

  4. INTERNATIONAL ISSUES: International issues like the COVID-19 pandemics and wars between nations affect the global market’s crude oil price. Crude oil prices collapsed in April 2020 due to falling demand in the pandemic. However, as vaccines roll out, the rate has risen from $40 a barrel to $63.50 for Brent crude.


ECONOMIC GROWTH AND OIL PRICE TRENDS







Crude Oil Price Trend SinceCovid (Brent crude per Barrel in USD)

Commodity Price Charts



GOVERNMENT TAXATION


Global crude oil prices have declined steeply since April 2021, and its value was nearly 40$ a barrel in October 2020( compared to 63.7$ a barrel in January 2020). Crude prices have risen by over 50% since October 2020. Many countries around the world are now reaching pre-pandemic prices, in line with the international crude oil trends, but it’s a much different scenario in India. India has seen record-high fuel prices since Jan 2021. As one can see from the above data, petrol prices never decreased while global crude prices kept plummeting. For instance, during June - August when the global crude oil prices were very low, the government first felt the economic deprivation due to lock down and started increasing taxes on petrol(increased by two-thirds) and diesel (doubled - the last page for data).

The rationale behind the constant increase in fuel prices is that both centre and state governments need money to fight Covid.

Taxes on fuel is a major source of revenue for both state and central government. On average, nearly 60% of what an individual pays at the filling station makeup the taxes levied.

Ever since the BJP formed Government under the Hon’ble PM Shri Narendra Modi, fuel prices have constantly been on the rise. Though international crude oil prices have significantly gone down many times over the years, Indian oil prices remained unaffected. The impact of this is highly felt by the Indian middle class, who rely on personal vehicles for daily commuting.

Indian government Deregulated Oil refineries, which means they can price their products in line with international prices. This has various drawbacks since the government constantly adjusts the taxes to benefit from its high revenue, which has been utilised for the construction of tall statues and other infrastructure-related projects but not good hospitals.

Indian GDP had contracted for two straight quarters devastatingly(GDP shrunk by a record 23.9% in the April to June Quarter because of the Covid.) The period after the lockdown should have marked a major Economic recovery if not for the high spike in international crude oil prices. The government did very little to subsidise the fuel prices to help its people get back on their bikes and start contributing towards economic recovery. The government seems to have done the opposite, and it tried to fill its treasury to make up for the oil revenue it has lost during the lockdown. This situation creates inflationary pressures, which will directly affect the momentum of Economic recovery.


EFFECT ON PEOPLE


In every scenario, the government always tries to maximise its revenue from oil taxation, without realising that it significantly impacts the daily lives of people from all economic sections, especially during a crisis like this pandemic.


Oil highly affects the economy of a country, particularly in India, many economists pointed out that the effect of higher oil prices will be felt by its large middle-class population but doesn’t affect the poorest. This may not be very realistic because oil had become a basic need for humans. Even farming requires diesel for running motors, its effect on the manufacturing sector goes without saying.


There is very little logic for prices to have spiked very high just after the lockdown, the economy needed a boost to recover, one might argue that increased oil prices will have a significant effect only on the people from the middle-class section of India as the car owners can afford to pay a little more. But in reality, there was no public transport after the lockdown, and even if there was, people wouldn’t opt for it as it increases their chance of infection. Almost all the middle and lower middle-class households in India have

two-wheelers, and the upper-middle-class and rich households will be using their

four-wheeler or two-wheeler for transit. Increased oil prices will then affect all sections of the society given the less public transport.

How to deal with this?

EFFORTS FROM PEOPLE


Oil is a foreign resource for Indians. Hence it should be conserved and utilised efficiently.

  1. For shorter distances, either uses a bicycle or walk. It will not only reduce oil consumption but also reduce pollution.

  2. We should try to use public transportation as much as possible, such as buses, metro stations, and rickshaws, rather than our private vehicles.

  3. Carpooling should be encouraged among people with the same destination and work.

  4. Drive cautiously and turn off your engines whenever there is a red signal traffic light.

  5. We should use CNG gas instead of oil because it is more cost-effective.

  6. Colleges/ Institutions have to encourage students to work on the startups regarding electric vehicles.

  7. Promoting health care programs that create awareness regarding the benefits of walking, running and encouraging our peers to take part in marathon events.

  8. A large portion of the crude oil consumption by vehicles. Thus going local would reduce the fuel consumption to some extent.

EFFORTS FROM GOVERNMENT


The main effort from the government should be devising ways to properly control taxation and fuel prices and planning.

  1. The government must implement policies requiring each family to have a limited number of vehicles.

  2. Scientists and researchers should be encouraged to develop vehicles that rely heavily on electricity and solar energy.

  3. Government should plan to increase the public transport vehicles with high security.

  4. Should encourage companies and startups which make low petrol consuming vehicles.

Encourage the population to go electric by providing various benefits in the form of tax deductions, the lower interest rate on loans, etc

  1. Start to promote the use of electric and solar vehicles, as these are renewable sources.

  2. The construction of better storage capacities for fuel can be beneficial in reducing the import of crude oil.

  3. For proper utilization of the current crude oil resources in the country, the government should try to fast-track the monetization of discovered resources. This can be achieved by focusing on production maximization over revenue maximization and providing allocation freedom.

CONCLUSION


The main objective of this term project would be to shed some light on the high oil prices and the improper planning and usage of revenue generated by oil prices due to uncontrolled taxation. The absolute need is to generate awareness among people regarding the significance of sustainable development.


Crude oil is a non-renewable resource that needs to be utilised judicially and preserved for the upcoming generation.



Data and graphs plotted for this term project are available here.


REFERENCES




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This is a research article written by the students of IIT Delhi. The co-authors of this article are- PULA JASWANTH RAM, K LAXMAN, JARPULAVATH SWAMI, NIKHIL RATHOD, MEHUL GARBYAL





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