Surging fuel prices have led to increase in freight rates across modes of transport, which is likely to push up inflation. While transporters have largely been able to pass on the cost of a sharp rise in the cost of diesel over the past three months, some smaller players may struggle with liquidity constraints, experts believe.
Oil marketing companies have hiked the prices of petrol by about Rs 10 per litre and that of diesel by about Rs 11 a litre across metros since last October-end, due to crude oil prices recovering to near pre-Covid levels and the government maintaining hikes in excise duty imposed last year to boost revenues. Petrol reached a new record of Rs 91.17 per litre in Delhi, while that of diesel hit a new high of Rs 88.60 a litre in Mumbai on Saturday, after the 16th upward revision in prices in February.
“The transport sector, be it passenger or freight transport, sectors where gensets are used, the telecom sector which uses diesel for their towers … in all of these sectors, the impact is high” said Vineet Agarwal, managing director of Transport Corporation of India, adding that logistics sector players had thus far been able to pass on the increase in operating costs due to rising fuel prices to consumers.
Agarwal, who is also the president of industry body Assocham, however, noted that transporters were only able to pass on costs to consumers with a lag and that operators for whom fuel cost is a larger proportion of operating cost may face severe working capital constraints due to rising fuel prices.
The ability of truckers to pass on the increase in fuel price can be seen in the increase in truck rentals in January and February. Truck rentals have seen a sharp increase of 6-8 per cent in February along key routes up from a monthly increase of 0.75-4 per cent in January, as per data collected by Indian Foundation of Transport Research and Training.
Higher fuel prices are pushing up freight rates, which could raise inflation and impact demand, according to experts. While transport companies are currently passing on the higher cost of fuel to consumers, some smaller players may face working capital issues due to higher operational costs.
SP Singh, senior coordinator and fellow, Indian Foundation of Transport Research and Training, said that increased movement of fruits, vegetable and food items coupled with an increase in dispatches from industrial areas had contributed to increase in the cost of truck rentals.
Agarwal too noted that rising fuel prices were having an inflationary impact on the economy as a whole and that Assocham had suggested that logistics players be permitted to claim input credits on fuel. Fuels including petrol, diesel and natural gas are currently not under the Goods and Services Tax (GST) regime which allows businesses to claim input tax credit on taxes paid on inputs when they pay goods and services on their products and services.
“In the short term, there is going to be an impact because higher freight costs can temporarily impact demand for end products and could impact demand for the products of MSMEs”, said Sameer Gupta, chairman of energy and engineering company, Jakson group and co-chair of the CII task force on Make in India. He, however, expects fuel prices to stabilise over the next few months which could come from a rationalisation in taxes or a reduction in crude oil prices. Brent crude closed at about $64.4 per barrel on Friday, up from about $51 per barrel at the beginning of 2021.
RBI Governor Shaktikanta Das too has called for a calibrated reduction in central and state taxes on petrol and diesel to contain any upward pressure on prices. The Centre hiked taxes on petrol by Rs 13 per litre and taxes on diesel by Rs 16 per litre in 2020, with several state governments also raising state taxes to boost revenues during the Covid-19 pandemic.
Rajasthan, West Bengal, Meghalaya and Assam have already cut state taxes on fuels in response to rising fuel prices. Das noted that inflation excluding food and fuel had remained elevated at 5.5 per cent in December on account of higher crude oil prices and the impact of high indirect taxes on petrol and diesel.
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