Brace for fuel price hike but experts advise the burden to be shared by all stakeholders

Since November 4, prices of petrol and diesel have been constant, and only commercial LPG prices were increased from March 1, with domestic LPG cylinders remaining untouched. Studies by the likes of Deloitte suggest at the very least a Rs. 8-9 per litre hike starting later this week. The common man seems resigned to the inevitable as oil prices of international crude surged past $130 a barrel when the Union Budget had assumed the price to hover around $70.

The Indian economy is diesel-based and any increase in its price sends the cost of every other thing upward. The weakening of the rupee against the dollar over time has also added to fuel costs. The exclusion of petrol and diesel from GST has led to a lack of transparency in retail pricing.

Rising crude prices and higher taxation, say some experts, also affect the country’s bargaining power with supplying nations. Most of the Indian oil companies– Indian Oil, Hindustan Petroleum, and Bharat Petroleum – are PSUs. The few private players are the big companies that also benefit from the government’s policies.

While complete de-regulation was done in 2014 making it legally permissible for them to align their prices with global rates, prices remained untouched since November largely to prevent anti-government sentiment from taking shape during an election season.

Mukesh Kumar Surana, chairman and MD of Hindustan Petroleum Corp, blames volatile global prices as the reason for no price revisions. Surana at a public function in February said that the volatility of prices the world over defeated the rationale of daily price changes or Dynamic Fuel Price Revision India adopted on June 16, 2017.

“Who gains from freezing prices due to elections or because the markets are volatile? I think everyone loses barring a few political gains that might be there. But then economics cannot be separated from politics,” said a senior economist.

The Union Government had reduced excise duty on petroleum products in 2018 as Chhattisgarh, Madhya Pradesh, Rajasthan and Mizoram went to polls. In 2019, during the general elections, the Union government again reduced excise duty on petrol and diesel by Rs. 1.5 per litre asking oil companies to bear Re. 1 of the cost. Fuel prices were also frozen just before the five state elections of West Bengal, Tamil Nadu, Assam, Kerala, and Puducherry in March-April 2021.

Dr. N.R. Bhanumurthy, vice-chancellor, BR Ambedkar School of Economics University, Bengaluru observes that international prices are changing every minute. The rise in prices is inevitable and will be painful, he observes.

The last time prices were hiked was when global crude oil was priced at US $80 per barrel. Pre-UkraineRussia war it shot up to US $100 and on March 8 it was US $130.

Dr. Bhanumurthy believes all stakeholders need to take the hit. “There must be a little bit of increase in retail prices, a little bit of reduction in the central duties, a little bit of reduction in state government’s taxes, and we will also need to take a hit on a little bit of growth. It needs to be distributed across the economy. The government may have to take more of a hit than households given that their budgets are already tight,” he says.

Rating agency ICRA in its report titled Crude Oil Impact on Indian Macros said it expects India’s current account deficit to widen to 3.2% of GDP in 2022-23 if the crude oil price averaged $130 per barrel, crossing 3% for the first time in a decade.

Senior economist and former member of Planning Commission, Dr. M. Govinda Rao notes that the integrity of the Union Budget numbers has come under a threat and the much-hyped increase in capital expenditures may not materialise as much as it was hoped.

Acknowledging that India has a problem, Dr. Rao, a former member of the Economic Advisory Council to the PM during the tenure of Dr. Manmohan Singh and who is now Chief Economic Advisor, Brickwork Ratings, foresees a massive increase of almost 60-70% in prices of fuel minus the tax as a result of freezing hikes over the past three months.

“Alternatively, the government will have to reduce taxes. So possibly, they might try to do both as to reduce the taxes the budget numbers will go for a toss. The revenue estimates are more or less realistic, but then it will impact the revenue collections,” he explains.

“There will be secondary effects on energy costs, transportation costs, and various other things that will substantially impact on the prices. And once the government decides that the oil companies should increase the prices, it will put huge pressure on the monetary policy of the Reserve Bank of India because it will breach the 6% ceiling of the inflation target,” he explains.

“Most people won’t even remember the price of a domestic gas cylinder, but petrol prices they will know. And so, hiking commercial LPG prices (though domestic has remained untouched as yet) given the subsidies, etc. didn’t cause the backlash seen with price hikes of other fuels,” they explained.

(This was first published in National Herald on Sunday)