FPJ Edit: Slowing economy, rising fuel prices

FPJ Edit: Slowing economy, rising fuel prices

EditorialUpdated: Wednesday, June 17, 2020, 03:32 AM IST
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-PTI

The economic slump is staring us in the eye. Unmistakable signs of a recession emerge daily. On Monday, wholesale prices entered the deflationary zone, signalling a lack of demand in the economy. For the first time in over four years, the Wholesale Price Index fell 3.2 percent last month. The reason was the economic lockdown following the coronavirus pandemic. Data for April was not made available. April was the first full month of the lockdown. National economies everywhere have shrunk due to the stoppage of normal activity. For example, the British economy shrunk twenty percent in April. Ditto for most European economies. But these economies can absorb the loss in GDP, spending their way out of the decline in growth. The Indian economy was already on the downward trajectory when the coronavirus hit; it will take longer to overcome the impact of the pandemic and to reverse the pre-existing downward slide. The dip in the WPI most likely will persuade the Monetary Policy Committee of the RBI to further lower the bank rate. Lower rates by themselves cannot recharge the economy. Look at the contraction in exports. In May, exports dipped 36 percent after a huge fall in the previous month. Only ray of hope were pharmaceuticals, iron ore, spices and rice; all other commodities suffered contraction. Exports of services in May also saw 16 percent contraction. Strangely, despite the dip in wholesale prices, prices of foodstuffs, including fruits and vegetables, were ruling strong. This was ascribed to the disruption in the supply chains thanks to the complete lockdown. Costlier petrol, diesel, CNG and LPG, etc., in spite of the sharp fall in the crude prices in the global market in recent months in a deflationary economy does not ordinarily make sense. But this is what the policy-makers seem to have decided to inflict on the consumers whose incomes have suffered further due to the lockdown. After a break of 82 days, the oil marketing companies were allowed to return to the daily revision of fuel prices. Since the reintroduction of the daily price revision regime, they have effected nine consecutive price increases. On Monday, the price of petrol was hiked by Rs. 0.46 paise per litre and that of diesel by Rs. 0.59 paise a litre. Since June 7, when the daily revision began, petrol price has gone up by Rs. 4.98 a litre and diesel by Rs. 5.23 a litre. Following the latest increase, a litre of petrol in Delhi costs Rs. 76.26 and Rs. 83.17 in Mumbai. Likewise, a litre of diesel in Delhi costs Rs. 74.62 and in Mumbai Rs. 73.21. Seventy percent of the retail price of fuel is excise duty, VAT, cess, etc. The current pump prices include the extraordinary levy of Rs 10 per litre excise and Rs 13 litre on diesel imposed during the coronavirus lockdown. The base price of a litre of petrol supplied to dealers is Rs. 18.28, including freight. The rest are all taxes, aside from Rs. 3.56 per litre commission for the dealer.

Meanwhile, many will question the rationale of higher fuel prices at a time when the economy is in the grip of a huge contraction and the global crude prices are still ruling at $ 40 a barrel. Costlier energy is bound to add to the pain of the people. But the government is not without its own reasons. Aside from the need to reverse the greenhouse effect, the government needs to raise revenue in a slowing economy with the situation having worsened further by the three month long lockdown. GST collections in May were down sharply. A sharp pickup is unlikely in June and in the following months. On the other hand, the fight against the coronavirus has entailed huge expenditures by the central and state governments. In sum, higher fuel prices offer one major avenue to make up for the lost revenues. How the government will counter the Opposition protests on the rising fuel prices is bound to test its political and PR skills. Sonia Gandhi already seems to have taken up cudgels for the long-suffering common man, writing a letter to the Prime Minister to protest the price hike. As an Opposition leader, she is right to protest.

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