India’s record high fuel price may hit revival
MUMBAI: India’s record pump prices of petrol and diesel are the newest threat to the economy’s nascent recovery, as high local taxes on retail fuel risk fanning inflation and driving a wedge between the objectives of fiscal and monetary policy makers.
Petrol prices were at an alltime high of ₹97.6 a liter in Mumbai on Tuesday, while diesel—the bellwether of industrial activity—sold for a record ₹88.6, data from state-run Indian Oil Corp. Ltd show. Taxes make up more than half of that cost and represent a sore point for the inflation-targeting Reserve Bank of India, which has vowed to keep borrowing costs low for as long as needed to support economic growth.
“Persistently higher prices could lead to a generalised inflationary environment, making it difficult for RBI to hold on to its growth commitment,” said Priyanka Kishore, chief India and South-east Asia economist at Oxford Economics in Singapore. “Rising fuel taxes, alongside the pick-up in global oil prices, could threaten India’s recovery.”
While revenue gains from taxes on retail fuel are key for the Centre and India’s states to boost spending in the economy that exited a rare recession last quarter, RBI sees those levies, along with elevated crude prices, already pushing core inflation higher. Any withdrawal of the easy monetary policy to combat price-growth will lead to a spike in borrowing costs, in turn hurting consumption and business activity at a time when millions of Indians are still out of work due to the pandemic.
“Enabling a calibrated unwinding of high indirect taxes on petrol and diesel – in a co-ordinated manner by centre and states – are critical to contain further build-up of cost-pressures in the economy,” Governor Shaktikanta Das said, according to the minutes of the latest monetary policy meeting.
Fuel taxes now make up nearly a fifth of New Delhi’s gross tax revenues, up from less than 10% nearly six years ago, according to calculations by economists at ICICI Securities and Primary Dealership.
While consumer price inflation is within the RBI’s 2%-6% target range for now, economists see the second round effects of higher pump prices on transportation and manufacturing sectors soon feeding into the headline print. “Rising inflation could limit room for RBI to inject liquidity to keep monetary conditions accommodative,” said Abhishek Gupta, India economist at Bloomberg.
Union minister Dharmendra Pradhan has for now shifted the blame for high prices on previous governments and production cuts by some oil exporting nations.
Prices of brent crude exceeded $60 a barrel last month, up from about $20 last April. India is the world’s thirdbiggest buyer of oil and higher prices inflate the import bill, and can cause the rupee to weaken. That in turn means higher input costs for other goods the country needs from overseas.