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Originally Posted by Maverick1977  The Govt on one hand levies heavy taxes and duties on these fuels, which incidentally are much higher than the actual cost of the fuels. |
FYI, excise and other duties on transport fuels is there in almost all countries (incl. the US) although the degree varies (FYI: diesel is priced higher than petrol in US). Excise has always been used as (a) means to discourage consumption (b) a reliable source of government income because of the relatively low price elasticities of demand. Also you should know, that not only in India, but a number of governments worldwide have responded to oil price increases with small cuts in fuel excise tax. However, the potential to shield users in this way is limited by the adverse effect on government finances. It is also not very prudent as it reduces incentives for fuel conservation and reduces consumer response to oil price increases. Most importantly, by not increasing prices in the same proportion as costs, it reduces the price elasticity operating on the oil exporting countries and thus increases their market power.