HIGHER FUEL PRICES, ALONG WITH GROWING ECONOMIC MOMENTUM, COULD ADD TO INFLATIONARY PRESSURES

As international crude prices increase, petrol-diesel prices will continue to increase if tax rates do not change. If Covid-19 infections in the advanced countries drop sharply with vaccinations, oil demand and therefore prices could increase from their current levels. In January, Goldman Sachs estimated Brent crude oil price to reach $65 by middle of 2021 as demand boosts from the roll-out of Covid-19 vaccines and there is limited increase in supply from OPEC+ countries.

This will entail an upward pressure on overall inflation numbers. Because fuel prices affect household budgets both directly (travel expenses) and indirectly (transport costs), they can have a significant cascading effect on prices. Experts have been pointing out that businesses might have been reluctant to pass on such costs to consumers when the economy was not doing well.

However, this could change with the economy picking up momentum. The latest monetary policy resolution of the Reserve Bank of India highlighted these concerns.

Given the centrality of petroleum products in the government’s fiscal calculations − the Budget assumes a very high excise duty collection and lowest petroleum subsidies ever – a sharp rise in global oil prices could force the economy into an unenviable trade-off between fiscal balance and inflation.