Friday, July 2, 2021

Indian Petrol Prices vs Demand

On 5th May 2021, Indian government hiked excise duty on petrol by ₹10 and on diesel by ₹13. Many of you argued that hiking petrol prices would be senseless under the current situation as this will further reduce the demand and effectively taxes. But when I was searching past literature regarding the same, look what I found!!

Price elasticity of demand for a product is defined as a percentage change in demand when you increase or decrease the price of a product by 1% (Economics 101). If this value is less than 1% (absolute) then that means your demand is inelastic, relatively insensitive towards price changes.

The literature says that Indian crude oil has elasticity of -0.43%, that means 1% increase in global oil prices would reduce import by 0.43%. Also, various studies have found that elasticity of diesel price stood at -0.5% and that of petrol is -1.1%. This also indicates a higher dependence on oil rather than alternative renewable resources in India.

References - [1][2]

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