Consumers are in for a painful surprise with fuel prices expected to surge upto 8-10 rupees a litre.
HEAD SHOT
- India moved on from a two-week revision model to a daily price revision model in June 2017.
- But in the election period, domestic fuel pricing was not compounded daily against rising global prices.
- The global oil pricing crisis induced by US sanction on Iran oil will be the first challenge for the new government.
- Consumers are in for a substantial hit to their pockets when the expected pricing update is made post elections.
With elections in full swing, adjusting India’s economic dynamics according to global developments have been ignored. State-run fuel suppliers and pump retailers have restrained from passing on the price surge to consumers with the prolonged polling for the General Elections 2019 underway, as sources aware of the situation told Reuters.
The action, or more aptly the inaction could worsen the future sores of consumers from rising oil prices when the delay is checked post-elections. Consumers will bear the brunt of the delay when substantial and abrupt price hikes could be initiated to balance the mounting difference.
Voters can’t be angered during elections, the pain can wait
Global oil prices were at their highest in 2019 on the 25th April. This was induced by US President Trump‘s decision to end Iran oil’s sanction waivers by May. The move puts pressure on Oil-import dependent countries like India to stop procuring oil from Tehran.
Pump prices in oil import heavy countries in Asia like Japan and South Korea are adjusted periodically. This helps keeping the domestic prices up with international crude prices and also ease the hit on consumers.
India moved on from a two-week revision model in June 2017 and adopted the daily price revision model. The government allowed retailers to set prices.
However, the practice has been put to a hold as pump prices have remained unchanged on a number of days during polling period.
As per Sri Paravaikkarasu, Director for Asia oil at Singapore-based consultancy FGE, retail prices paid by consumers at pumps would have already been up by 6 percent, or approximately 4 rupees if the price in India was being adjusted regularly according to the global rise. He said:
“Indian pump prices have failed to keep up with the recent uptrend in crude prices”
Keeping consumer frustration from impacting voter sentiment
Sri Paravaikkarasu also opined that the incumbent government is consciously keeping consumer prices at bay with the country’s general elections underway.
As similar sentiment is echoed by the opposition party Congress.
Senior Congress leader Akhilesh Pratap Singh alleged that the Modi government was acting in violation of its own policy of daily price revision by holding up the state-run companies from increasing prices.
“The government should cut fuel taxes otherwise consumers will have to pay much higher oil prices once the elections are over,” He said.
As per Reuters, state-run fuel suppliers, pump retailers and a government spokesman have declined to comment on the reason behind the delay or the alleged pressure from the Modi government.
Part of the Learning curve
Hiking oil prices significantly comes with backlash. The Modi government faced protests when the price of crude oil was hiked by 100 rupees a litre in 2018. The backlash forced the government to slash fuel taxes.
Similar situation unfolded in Karnataka in 2018 when price fluctuation was put on hold for 19 days across the country during the state assembly elections. Nitin Goyal, treasurer at the All India Petroleum Dealers Association explains that the consumers will again bear the brunt of the static pricing during elections. Goyal said:
“Consumers should be ready for a rude shock of a massive jump in retail prices, similar to the level we have seen in the Karnataka state election,”
Oil price surge will kick up food prices and… inflation
Being heavily dependent on imported oil, a higher global price hike will work adversely for the economy. Weakening rupee, higher inflation, stagnant interest rate will amplify current account and budget deficits, as per economists.
Crude oil prices have gone up by nearly $9 a barrel (12 percent) in the past six weeks. However, petrol and diesel prices in the capital New Delhi have only risen by 0.47 rupees a litre, or 0.6 percent.
The RBI’s Monetary Policy Committee has warned that oil price rise would kick up food prices and push up inflation. Sustained oil price hikes have also left legislators and finance experts worried as this will depreciate rupee down by 3-4 percent on an annual basis.
Cost of ignoring fuel prices in an oil-import dependent nation
Economists believe the surge in oil pricing will hinder growth for India to less than 7 percent rate in the fiscal year. GDP growth for Asia’s third largest economy was at its slowest in five quarters at 6.6 percent in October-December.
India paid oil imports of $140.5 billion in the fiscal year ending 31st March 2019, this was an almost one-third hike against the $108 billion in the preceding year.
A rise of 10 percent in global pricing will increase dollar demand, thereby putting rupee under pressure and widen the current account deficit, warned Credit Rating agency CARE.
A note from Indian arm of the Fitch rating agency, ICRA stated:
“The increase in international oil prices is a credit negative for the Indian economy. Every $10/ bbl increase would also increase the fiscal deficit by about 0.1 percent.”
A painful surge is inevitable after the polls.
PARTING SHOT
- A sudden hike is expected in fuel pricing post-elections where the consumer might have to pay upto 8-10 rupees more per litre.
- Opposition has accused that the Modi government is violating its own policy of daily price revision by holding up the state-run companies from increasing prices.
- Similar situation unfolded in 2018 when price fluctuation was put on hold for 19 days across the country during the Karnataka state assembly elections.
- The RBI’s Monetary Policy Committee has warned that oil price rise would kick up food prices and push up inflation.
