In fuel hike, politics meets economics

Soon after Prime Minister Narendra Modi’s appeal to adopt austerity measures, including reducing fuel consumption, petrol, diesel, and CNG prices have been hiked for the first time in more than four years. The retail prices of petrol and diesel were raised by Rs 3 per litre.

The hikes are intended to absorb the impact of the global crude oil prices, which soared in the wake of the war in West Asia. A Rs 10-per-litre cut in special excise duty was announced in March to partly offset the losses incurred by oil marketing companies (OMCs).

Though the increases looked inevitable, the Assembly elections in West Bengal and other states prompted the government to delay it. So, the decision is as much political as it is economic. The impact of economic shocks such as oil price hikes can be moderated and regulated if timely decisions are taken, and there is transparency about them. 

The mounting losses faced by the OMCs are cited, rightly, as the reason for the price hike. The public sector retailers were estimated to lose around Rs 1,000 crore daily when crude prices hovered above $100 per barrel. The hike is not expected to compensate them fully for their under recoveries. This suggests the possibility of more and higher retail price increases in the coming weeks.

The global oil supply situation is expected to be uncertain for the next few months, even if the war were to stop now. So, prices could remain elevated throughout this year, and so the pressure is likely to continue. Also, access to supplies from Russia is dependent on US policies and pressures. 

The shock of the price hike will travel through the whole of the economy and trigger inflationary pressures that have been under control. The impact is already visible. Manufacturing costs have increased across all sectors.

Shortages have forced many establishments, particularly in the food and hospitality sectors, to cut their daily operations or to close.

Many have started passing on the higher costs to consumers. The wholesale price index has already gone up to 8.3% in April, up from 2.3% in February and 3.9% in March.

The consumer price index (CPI) will soon reflect the new prices as fuels carry a weight of about 5% in the CPI basket. It is estimated that the price hikes could raise annualised inflation by around 25 basis points.

This will take inflation beyond the Reserve Bank of India (RBI)’s comfort level and may lead to an increase in interest rates. Beyond the percentages, there will be severe stress on the budgets of common people and families.