The variation of prices of petrol and diesel since June 2002 in the metro cities in India and the impacts of international crude oil prices and exchange rates on such prices in these cities are examined. It is observed that the rates of growth in the prices of petrol and diesel were faster during June 2002 to May 2004 (first National Democratic Alliance regime) as compared to that of crude oil. It increased moderately during June 2004 to May 2014 (United Progressive Alliance regime), despite the international crude oil price reaching a very high level, while the rates of growth of petrol and diesel prices were steady till December 2018. The price of crude oil fell significantly during 2015, although it increased thereafter. But the fall has not been significantly reflected in final petrol and diesel prices. This was because of a significant increase in excise duty and value added tax.
Prices of fuel, particularly the prices of petroleum products, are important factors in the economic performance of a country. Transport cost forms a major part of the prices of several items, because the items need to be transported from production centre to final point of sale. The transport cost is greatly influenced by the fuel cost, apart from distance, mode of transport, type of product and so on. Hence, fuel price enters into the prices of most of the goods and services. Budgets of individuals in the economy and their welfare levels are thus greatly influenced by the price of fuel especially diesel, which has been used for mass transportation of goods and services. However, there is very little relation of retail petroleum prices with the variation in its demand, since use of petrol is considered as an essential consumption item with hardly any comparable substitute. For the personal vehicle owners, it is even considered as a so-called Giffen good and there has been a general rise in consumption and expenditure on petrol with rising prices (Marshall 1895; Masuda and Newman 1981; Bopp 1983; Jensen and Miller 2008; Evans-Pritchard and Winnett 2008). Thus, the rise in the prices of petroleum products has significant impacts on the general consumers’ price index.
Courtesy — Economic and political weekly