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India’s Fuel Price Problem Needs Urgent Solution

Fuel pump

Soaring gasoline and diesel prices in India require urgent action, Oil Minister Dharmendra Pradhan told media, and the government is trying to find a solution to the problem, which comes as a result of a substantial increase in benchmark oil prices and India’s excessive dependence on imported crude.

One way the government is considering to reduce the pressure on consumers is by introducing a windfall tax on local oil producers, to be activated in case international prices exceed US$70 a barrel. Since Indian oil producers sell their crude at international prices, any revenues from oil sales at more than US$70 would be collected by the state and transferred to fuel retailers to cushion the price blow to end consumers.

After Brent crude last week passed the US$80 threshold for the first time in four years, Pradhan called on Saudi Arabia and OPEC to do something about prices, calling this level unreasonable. Khalid al-Falih was quick to assure his Indian counterpart and the market at large that there is no fundamental reason why crude should be trading so high, even though earlier he had said Saudi Arabia would like to see oil at US$80 or even higher.

India imports more than 80 percent of the crude oil it consumes. Annual imports right now are about 1.575 billion barrels and for every dollar change in oil prices upwards, its import bill swells by US$13 million.

Related: How Does Oil Impact Bond Markets

Naturally, this also affects the economic growth of the world’s third-largest consumer of oil. With national elections scheduled for next year, Narendra Modi’s government is very motivated to find a long-term solution to the problem to reverse popular sentiment that it is not doing enough to shield people from higher fuel bills.

In this situation, some analysts believe it would be wise for the government to take more tax action, but in another direction: reducing value-added tax in Indian states and the national excise duty would be another way of tackling the problem, Indian media reported this week citing some of these analysts.

By Irina Slav for Oilprice.com

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