High level of taxation widens divergence in diesel inflation in WPI, CPI

A steady increase in diesel prices has been pushing up inflation for consumers across India at a time they are grappling with a crippling second wave of the Covid-19 pandemic. Diesel retail prices are back to more than Rs 80 a litre in the national capital throughout this month and remain on an upward trajectory.

According to sector watchers, the prices will remain firm and, in the near term, will only taper if the Centre and state governments agree to trim taxes. Taxes continue to form a large chunk — comprising well over 50 per cent of the sale prices in most states — auto fuel rates.

The high level of taxation is reflected in the divergence of diesel inflation in the wholesale and consumer price indices. In diesel, it has shown a deflationary trend from February 2020 to January 2021 in the Wholesale Price Index (WPI). But it has shown an inflationary trend in the Consumer Price Index (CPI) during the same period.

According to economists, this is because the WPI does not take into account the taxes that are levied on end products while the CPI does. The Centre had raised excise duty on petrol by Rs 13 a litre and that on diesel by Rs 16 in March and May 2020. After these hikes, the excise on petrol stands at Rs 32.98 a litre while on diesel it is Rs 31.83 a litre. Some states also hiked value added tax but trimmed their share when petrol prices began to touch Rs 100 a litre in certain districts. The Centre continued to maintain the excise levels.

Commenting on the impact of higher diesel prices on inflation, Aditi Nayar, chief economist, ICRA, said, “Diesel has a large weight in the WPI, 3 per cent in the headline index, and as much as 38 per cent of the mineral oil basket. Moreover, it has important implications in terms of the second-round impact on prices of other items, given its predominance in road freight in India.” This makes it a crucial item to watch to gauge the trajectory of WPI inflation. “Given the crash in global crude oil prices last year, followed by the sequential strengthening we have seen in the recent months, fuel inflation is experiencing a double whammy,” she added.

According to Devendra Pant, chief economist and head public finance, India Ratings, the higher diesel prices have a much more severe cascading effect. “A 10 per cent increase in diesel prices will result in 31 basis point increase in wholesale inflation directly. In April 2021, diesel inflation was 33.82 per cent and this has contributed 105 basis points to the April 2021 wholesale inflation.”

According to Pant, the second-round impact is through an increase in transportation cost of goods. Diesel in CPI is part of two sub-groups — “fuel and light”, and “transport and communication” with combined weight of 0.15043 per cent. A 10 per cent increase in retail price of diesel will result in a 2 basis point increase in retail inflation. However, the second-round impact due to higher transportation cost will have a larger impact on retail inflation, he added.

The higher diesel prices have already started hurting margins of transporters, according to S P Singh, Senior Fellow and Coordinator at the Indian Foundation of Transport Research and Training. According to Singh, truck rentals, which are falling due to low demand, would have been 5-7 per cent lower if the diesel prices were cheaper.

Since the start of this month, the price of diesel has risen by around Rs 4 to Rs 84.61 a litre (as of Thursday) in Delhi. Under the existing pricing structure, petrol and diesel prices can change daily and differ according to districts. Hinting at tougher times to come for consumers, N Vijayagopal, Director (Finance) at Bharat Petroleum Corporation, told Business Standard, “Either the (international) prices will soften or the government will reduce taxes. Unless one or both of these happen, we have no choice but to continue increasing the retail selling prices.”

India’s domestic petrol and diesel prices are linked to global benchmarks of similar commodities. A spike in international product rates pushes up prices in India.