A BURNING ISSUE

HIGH FUEL COSTS THREATEN TO STOKE INFLATION AND PROMPT SPENDING CUTS BY CONSUMERS, HURTING INDIA’S FRAGILE POST-PANDEMIC RECOVERY

High fuel costs could stoke inflation and prompt spending cuts by consumers

At a time when Covid-19 has already taken a toll on thousands of lives and millions of livelihoods, there comes a new burden for consumers—soaring fuel prices. Over the past year, petrol prices in Delhi have risen nearly 24 per cent, with diesel prices rising 23 per cent. On February 22, petrol was priced at Rs 90.58 a litre in the capital, while diesel cost Rs 80.97. Rates were even higher in Mumbai, with petrol at Rs 97 a litre and diesel at Rs 88.06, both lifetime highs. In a few cities, such as Sri Ganganagar in Rajasthan and Anuppur in Madhya Pradesh, petrol has crossed the Rs 100 per litre mark.

Not only are high fuel prices burning a hole in consumers’ pockets, they are also threatening to stoke inflation via increased transportation costs. A further spike in inflation could potentially prevent the Reserve Bank of India (RBI) from cutting lending rates, dampening India’s efforts to engineer a sharp post-Covid rebound in growth. A recent survey by Local Circles, a community-based social media network, of 22,000 citizens across 291 districts, showed that Indians are cutting back on spending to cope with rising fuel prices.

There are two reasons for the soaring fuel prices. One is the increase in the price of crude oil in the international market. The price of Brent crude, the raw material imported by Indian refineries, was about $63 a barrel (about Rs 4,560) on February 22. This is a steep rise compared to crude prices in late March last year, when the world went into a lockdown. Crude prices had then crashed from the highs of over $70 a barrel (Rs 5,065) in January 2020, to around $14 to a barrel (Rs 1,013) on March 31. By May, prices had risen to the $20 (Rs 1,447) mark, and ever since, have largely trended upward. The development of vaccines for Covid-19 and higher fuel demand post the lockdowns led to a revival in international crude oil prices. Moreover, Saudi Arabia, the second-largest oil-producing nation after the United States, voluntarily cut oil production by one million barrels a day for the months of January and February in a bid to bridge the supply and demand imbalance. “Saudi Arabia is seeing a big threat to oil demand due to the continuing lockdown in several parts [of the world],” says Prashant Vasisht, vice president and co-head of corporate ratings at ICRA. OPEC (Organization of the Petroleum Exporting Countries) nations have also adhered to agreed supply cuts over January.

THE CRUDE IMPACT

India imports over 80 per cent of its crude oil requirements. Therefore, the increase in global crude prices directly impacts domestic fuel prices. In 2019-20, India imported 270 million tonnes of crude oil at a cost of $120 billion (Rs 8.76 lakh crore). With the economy emerging from the lockdown, the demand for fuel has soared, necessitating higher imports. In December, oil imports were about 29 per cent more than the previous month and about 11.6 per cent higher than a year earlier.

Since 2010, when petrol prices were decontrolled in India, prices have moved in tandem with international crude rates (the decision to decontrol diesel prices was implemented in 2014 to similar effect). Prices of petrol and diesel in India are fixed based on a 15-day average of benchmarked Arab Gulf fuel prices. Between April 1 and December 10 last year, petrol prices were revised 67 times. These revisions hit the headlines as fuel prices reached historic highs. “There are two main reasons behind the fuel price rise. The international market has reduced fuel production—[oil-producing] countries are producing less fuel to gain more profit. This is making consumer countries suffer,” Union petroleum minister Dharmendra Pradhan said on February 21.