Monday, March 27, 2023
HomeEconomyYou think inflation is already high? Wait until petrol-diesel prices jump after...

You think inflation is already high? Wait until petrol-diesel prices jump after elections

Consumers in India have enjoyed artificial respite from rising global prices since 4 November — crude has gone up by almost $14 a barrel — and oil companies need to make up for losses.

Text Size:

New Delhi: Consumers enjoying stable petrol and diesel prices for more than three months now can expect a rude jolt in early March.

The artificial respite from rising fuel prices and even the substantive politically-influenced rollback in several states is likely to make way for a steep increase after the last phase of assembly elections in Uttar Pradesh on 7 March due to a combination of reasons.

Some market experts expect the increase to be as high as Rs 8 per litre for petrol and diesel as global crude oil prices have risen by almost $14 per barrel since 4 November —  the last time retailers in India changed domestic prices and oil companies need to make up for the losses so far.

Analysts fear this could further contribute to inflation, which has already crossed the upper end of the RBI’s comfort zone of 2 per cent to 6 per cent, unless the central and state governments once again stomach a cut in taxes on petrol and diesel.

The price of the crude oil that India imports rose to $94.54 per barrel Monday, the highest level since October 2014, according to data from the government’s Petroleum Planning and Analysis Cell.  Crude oil prices had risen as geopolitical tensions between Ukraine and Russia stoked supply concerns amid low inventories. However, Russia is now pulling back some of its forces from near Ukraine, which may ease global prices.

Oil companies in India are legally free to align their prices with global rates, after the complete deregulation of fuel prices in 2014  but, fearing public backlash, they usually have to freeze prices in the run-up to elections.

The Organization of the Petroleum Exporting Countries (OPEC), which largely holds the supply of crude to India, said last week that world oil demand might rise even more steeply this year, as the global economy posts a strong recovery.

Mukesh Kumar Surana, chairman and managing director of Hindustan Petroleum Corporation Ltd, claimed at a public event last month that state-owned fuel retailers have not been raising prices as global prices are extremely volatile, and price revisions in such a scenario would be counterproductive to the purpose of daily price changes.

“There is sensitivity to prices. Therefore, when prices are elevated, there are concerns, and so we are ensuring the least inconvenience to consumers,” Surana had claimed, adding that fuel retailers are trying to keep prices aligned “over a period” rather than aligning on a daily basis for the time being.

Also read: Oil prices inch towards $100 a barrel, threaten to compound world economy’s inflation shock

Upward revision likely after polls, govt intervention expected

Calculations by experts show that the prices of petrol and diesel may increase by Rs 7-8 per litre, given that global crude prices remain at the current level. To reduce the burden on the consumer, the government would have to absorb some of the hike, depending on its fiscal position.

According to private estimates, a $1 increase in global crude prices results in a 45-paise increase in the domestic prices of petrol and diesel. 

Siddharth Kothari, an economist at Mumbai-based Sunidhi Securities, said, “The recent surge in international prices has also pushed the Indian crude oil basket to $94.55 per barrel. That may require an upward revision in the retail prices of petrol and diesel by a minimum of Rs 7.50-8.00 per litre. The actual burden can be marginalised by lowering the duty component, notwithstanding the impact on the exchequer.”

It’s difficult to determine the actual hike in retail prices as the government is expected to absorb some of the increase by lowering the excise duty on petrol and diesel, as was done last year.

A report by Mumbai-based QuantEco Research said that the domestic prices will need to be aligned with international prices, which have risen 36 per cent, predominantly due to geopolitical factors.  

“While the government could choose to absorb part of this burden depending upon the actual 2021-22 fiscal situation vis-à-vis the revised estimates, as of yet there is lack of clarity on this front,” the report said.

Prices unchanged since 4 November

The prices of petrol and diesel have largely remained unchanged since 4 November. In the national capital, petrol is sold at Rs 95.41 per litre and diesel at Rs 86.67 per litre. In Mumbai, petrol is sold at Rs 109.98 per litre and diesel at Rs 94.14. Prices of the two fuels vary across the country depending upon state levies.

Bharat Petroleum Corporation Ltd and Hindustan Petroleum Corporation Ltd, the two state oil retailers, follow Indian Oil Corporation in price revisions.

On 3 November, in order to cool retail prices from record highs, the central government made a steep cut in excise duty on petrol and diesel, by Rs 5 and Rs 10 respectively. This was followed by a cut in Value Added Tax in many states and Union territories to give further relief to consumers.

Fuel prices depend on several key factors, including fluctuation in prices of crude oil, the rate of conversion of the Indian rupee against the US dollar, and tax rates among others.

(Edited by Rohan Manoj)

Also read: India headed for steep fuel price hike after state polls end next month, Deloitte says


Subscribe to our channels on YouTube & Telegram

Support Our Journalism

India needs fair, non-hyphenated and questioning journalism, packed with on-ground reporting. ThePrint – with exceptional reporters, columnists and editors – is doing just that.

Sustaining this needs support from wonderful readers like you.

Whether you live in India or overseas, you can take a paid subscription by clicking here.

Support Our Journalism

Most Popular