Context :- The rupee seems to be on a trajectory of decline, with its value relative to the dollar (as per the Reserve Bank of India’s reference rate) falling from Rs.76.4 at the beginning of April to Rs.79.1 at the beginning of July.
Cause:-
- India’s trade deficit has increased in recent months as export growth remained sluggish and imports registered a sharp increase (In June, with exports estimated at $38 billion and imports at $63.6 billion, the trade deficit rose to a new high of $25.6 billion)
- Foreign portfolio investors are pulling out of Indian equity and debt markets.
- High inflation across the world resulted in significant increases in policy interest rates by the US Federal Reserve and other developed country central banks, thus investors are booking profits that accrued over a two-year boom in Indian markets and exiting the country now.
- Spike in oil prices following the Ukraine invasion, which has inflated the import bill, and restrictions on exports for India.
However, there is another observation:-
- Even as the rupee has depreciated vis-à-vis the dollar, it has actually strengthened against other hard currencies such as the euro and the yen
Thus, Duvvuri Subbarao, a former RBI Governor advocates:-
- The RBI should lean towards non-intervention rather than intervention, and allow the rupee to gradually depreciate.
- And it should not be a cause of worry as forex reserve is around $600 billion.
Nonetheless, there are some causes to be worried about:-
- High import bill is not on account of higher oil prices alone but also because of increased imports of commodities varying from gold to coal.
- Coal Crisis:- Coal imports were unavoidable because stocks with the thermal power plants had touched unsustainable lows, raising concerns about large-scale power outages
- India’s coal crisis is the result of the failure of policies aimed at restraining the public sector’s role in coal production and getting the private sector to step in.
- While the objective of curbing public sector growth worked, the drive to get the private sector to fill the gap was a failure
Conclusion:-
In recent years there were three episodes of sharp rupee depreciation: in August 2019, March 2020, and over May-June 2022. In all three instances, a common and important driver of the depreciation was the outflow of capital.
Seen from this angle, the recent and rapid depreciation of the rupee vis-à-vis the dollar does give cause for concern. The drivers of the depreciation are not all short term. The trade deficit threatens to remain high for quite some time. And the excess inflow of capital that propped up the rupee even when deficits widened has all but dried up.
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Petrol in India is cheaper than in countries like Hong Kong, Germany and the UK but costlier than in China, Brazil, Japan, the US, Russia, Pakistan and Sri Lanka, a Bank of Baroda Economics Research report showed.
Rising fuel prices in India have led to considerable debate on which government, state or central, should be lowering their taxes to keep prices under control.
The rise in fuel prices is mainly due to the global price of crude oil (raw material for making petrol and diesel) going up. Further, a stronger dollar has added to the cost of crude oil.
Amongst comparable countries (per capita wise), prices in India are higher than those in Vietnam, Kenya, Ukraine, Bangladesh, Nepal, Pakistan, Sri Lanka, and Venezuela. Countries that are major oil producers have much lower prices.
In the report, the Philippines has a comparable petrol price but has a per capita income higher than India by over 50 per cent.
Countries which have a lower per capita income like Kenya, Bangladesh, Nepal, Pakistan, and Venezuela have much lower prices of petrol and hence are impacted less than India.
“Therefore there is still a strong case for the government to consider lowering the taxes on fuel to protect the interest of the people,” the report argued.
India is the world’s third-biggest oil consuming and importing nation. It imports 85 per cent of its oil needs and so prices retail fuel at import parity rates.
With the global surge in energy prices, the cost of producing petrol, diesel and other petroleum products also went up for oil companies in India.
They raised petrol and diesel prices by Rs 10 a litre in just over a fortnight beginning March 22 but hit a pause button soon after as the move faced criticism and the opposition parties asked the government to cut taxes instead.
India imports most of its oil from a group of countries called the ‘OPEC +’ (i.e, Iran, Iraq, Saudi Arabia, Venezuela, Kuwait, United Arab Emirates, Russia, etc), which produces 40% of the world’s crude oil.
As they have the power to dictate fuel supply and prices, their decision of limiting the global supply reduces supply in India, thus raising prices
The government charges about 167% tax (excise) on petrol and 129% on diesel as compared to US (20%), UK (62%), Italy and Germany (65%).
The abominable excise duty is 2/3rd of the cost, and the base price, dealer commission and freight form the rest.
Here is an approximate break-up (in Rs):
a)Base Price | 39 |
b)Freight | 0.34 |
c) Price Charged to Dealers = (a+b) | 39.34 |
d) Excise Duty | 40.17 |
e) Dealer Commission | 4.68 |
f) VAT | 25.35 |
g) Retail Selling Price | 109.54 |
Looked closely, much of the cost of petrol and diesel is due to higher tax rate by govt, specifically excise duty.
So the question is why government is not reducing the prices ?
India, being a developing country, it does require gigantic amount of funding for its infrastructure projects as well as welfare schemes.
However, we as a society is yet to be tax-compliant. Many people evade the direct tax and that’s the reason why govt’s hands are tied. Govt. needs the money to fund various programs and at the same time it is not generating enough revenue from direct taxes.
That’s the reason why, govt is bumping up its revenue through higher indirect taxes such as GST or excise duty as in the case of petrol and diesel.
Direct taxes are progressive as it taxes according to an individuals’ income however indirect tax such as excise duty or GST are regressive in the sense that the poorest of the poor and richest of the rich have to pay the same amount.
Does not matter, if you are an auto-driver or owner of a Mercedes, end of the day both pay the same price for petrol/diesel-that’s why it is regressive in nature.
But unlike direct tax where tax evasion is rampant, indirect tax can not be evaded due to their very nature and as long as huge no of Indians keep evading direct taxes, indirect tax such as excise duty will be difficult for the govt to reduce, because it may reduce the revenue and hamper may programs of the govt.