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EFFECTS OF HIGH FUEL PRICES ON INDIAN ECONOMY


The price of fuel has risen sharply in 2021 in the view of a recovery in global demand as the world economy recuperates from the post Covid-19 pandemic. All this a question - How does the economy suffer from the hike in fuel prices?

The prices of fuel have once again touched new highs. In the previous few years, the prices of oil have seen a steady decline. Around a year ago, the reduction in the GDP could be credited to the sharp fall in crude prices. Things, however, started turning about two years ago and have gathered pace in the past few months.


Escalating international oil rates and exorbitant domestic tax structure are two prime reasons for high fuel rates.

High fuel prices put the Indian economy on a slippery track. Some effects includes: -


1. High import reliance and adverse impact on fiscal deficit

India, being a developing country, imports around 80% (1.5 barrels) of its yearly oil requirement. The surge in crude oil prices could double India’s expenditure, thus unfavorably affecting India’s fiscal deficit, the difference between the government’s total revenue and total expenditure.


2. Exchange Rate Woes

The Indian rupee has already devalued against the United States dollar, as people are trying to trade rupees for dollars. If the price of oil increases, the government will be compelled to exchange rupees for dollars. The doubling import bill puts tremendous pressure on the rupee resulting in a further severe drop in the value of the rupee.


3. Current Account Deficit (CAD)

India’s increasing dependency on crude oil imports exerts a great impact on the Indian Current Account Deficit (CAD). It indicates how much India owes the world in foreign currency. Expanding CAD further exerts pressure on the currency along with the rest of the economy.


4. Stock market The Indian stock markets are under immense pressure due to the sudden hike in crude oil prices. With an alarming increase, there has been a sell-off in small cap and mid cap stocks.

5. Cost of inventory A large number of Indian companies like tyres, lubricants, refining and airline companies rely on healthy fuel cost. The profitability of these companies is adversely influenced which could impact stock prices in the near future.

6. Inflation Oil is a very important raw material in various industries and is required to meet domestic fuel needs. A hike in the price of crude oil leads to an increase in the cost of producing goods which is ultimately to be borne by the consumers resulting in inflation.

7. Discretionary Spending Hikes in the fuel prices are taking a toll on the Indian consumers. Their incomes are not rising while a rise in fuel prices is consuming a major portion of their income. Hence, their discretionary spending is additionally being lowered.



If fuel prices continue to increase, there will be a huge burden on people. To avoid that situation, necessary remedies are to be taken including: -


Reducing taxes on petroleum products The Indian government should create more revenue sources such as increasing the number of people that pay income tax. There is an urgent need to encourage people to start using renewable energy resources.


By - Gauri

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