ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Who Bears the Burden of Rising Prices of Petroleum Products Due to Taxes in India?

The hike in the prices of petroleum products in India post 2014, primarily due to higher petroleum taxes, is examined. Household consumption expenditure data collected from the India Human Development Survey (2011–12) is analysed using the input–output framework to understand both the direct and indirect effects of rising prices of petroleum products. Results indicate that petroleum taxes are highly regressive, especially at the bottom two consumption expenditure deciles, as raising prices of petroleum products increases the overall cost of living. Results also reveal that households in the middle- and upper-income groups have the similar burden of rising petroleum prices, indicating that tax is not progressive.

The authors thank the anonymous reviewer/s for their valuable comments on the first version of the paper.

Taxes on petroleum products such as petrol and diesel are generally regarded to have welfare and distributional impacts on people. It results in price rise, affecting people’s lives directly and indirectly (Symons et al 2002; Feng et al 2018). The direct impact of a price hike manifests through the demand side in the form of a decrease in the consumption of other essential goods and services. It depends upon the market structure and degree of price elasticity of demand due to a decline in the overall purchasing power of the households. The indirect impact arises through the supply side as these products are widely used as essential inputs in the production process (Agostini and Jimenez 2015; da Silva Freitas et al 2016). Thus, an increase in the price of petroleum products may increase the output price and thereby affect the spending capacity of the bulk of the society. For example, diesel which is primarily used in India’s transportation sector accounted for about 40% of the total petroleum products consumed in India during 2018–19 (GoI 2019). Therefore, an increase in the diesel price would necessarily increase the transportation cost of both people and goods and services, and as a result, the price of essential goods and services would rise (Patra 2018).

The distributional impact of fuel price hike may also vary between developed and developing countries (Blackman et al 2010). While a price hike is expected to be generally regressive in developed countries where vehicle ownership is widespread across all socio-economic classes, in developing countries, it would be less regressive as vehicles would be owned mostly by members in the higher deciles of the income distribution (Sterner 2007). However, while considering the extent of the availability of public transport, petroleum tax would be more regressive in poor and developing countries as most people use public transportation. Hence, an increase in the price of transportation fuel would raise the cost of transportation (Blackman et al 2010; Melnnes 2017). For example, while in the United States (US) and the United Kingdom (UK), 980 and 850 per 1,000 individuals own a car, respectively, in India, it is just 22, indicating that most Indians still rely on public transportation.

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Updated On : 24th Apr, 2023
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