Tuesday 28 June 2022
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Fuel prices to rise next week amid concern over inflation

The government could not cut fuel taxes earlier to soften the blow, at least before March-end, considering the impact it would have had on state revenues

Fuel (petrol and diesel) prices may rise next week for the first time in more than four months as global crude prices soar after Russia’s invasion of Ukraine last week, union government sources said, amid growing concern of inflation. Asia’s third-largest economy, which imports 80% of its oil needs, faces retail inflation staying above the Reserve bank of India’s tolerance limit of 6% as companies pass on a nearly 40% rise in crude prices since November, as well as rises in prices for other imported raw materials, economists said.

State-run oil companies, which control the domestic market, have not raised prices since 4 November, aiming to help the BJP in crucial state assembly elections including in the most populous state of Uttar Pradesh. “The oil companies would be free to raise prices in a phased manner once the election is over on 7 March,” a senior government official with the knowledge of internal discussions on oil prices said.

Opposition parties may push for fuel tax cuts when the parliament meets from 14 March.

Fuel prices surged after Russia invaded Ukraine on 24 February, with Brent rising above $ 116 a barrel on Thursday, while supply disruptions have hit global prices of wheat, soybean, fertiliser and metals like copper, and aluminium – raising worries about prices and economic recovery.

State oil companies have told the government that they need a price increase of Rs 10-12 per litre for petrol and diesel, a second official said.

A senior official at a state-run oil marketing company confirmed that they were facing difficulties though he declined to give figures.

“We are incurring huge losses,” the oil marketing company official said.

The government was unlikely to cut fuel taxes to soften the blow, at least before the March-end of the fiscal year, considering the impact of that on state revenues, said another senior government official, with knowledge of the budget.

The central and state governments, which collect over 100% tax on the basic price of petrol and diesel, cut factory gate duties and sales tax on fuel products in November, after a public outcry.
“We may consider a proposal to cut fuel tax in April,” said the official with knowledge of the budget, referring to the cut in excise duties on petrol and diesel in November.

All three officials declined to be identified as the discussions are confidential.

The finance and oil ministries declined to comment.

Growing inflation fears

Economists said a 10% rise in pump prices is likely to push retail inflation by 50-60 basis points through direct and second-order effects, prompting consumers to cut spending on durables and luxury products.

Retail inflation rose a seven-month high of 6.01% year-on-year in January, crossing the upper limit of the Reserve Bank of India’s (RBI) tolerance band, pushed by rising fuel and manufacturing prices.

Rising retail fuel prices would have a direct impact on prices of household goods and services depending on energy intensity, said Saugata Bhattacharya, chief economist at Axis Bank.

“However, the RBI’s Monetary Policy Committee (MPC) is unlikely to immediately start tightening monetary policy, given widespread multi-dimensional uncertainties on the growth momentum.”

Impact of Ukraine situation on fuel prices

Over and above the aforementioned reasons, the Russian-Ukrainian will impact fuel prices in India. The war will hit Indian industries and crude oil imports from Russia, PHD Chamber of Commerce and Industry’s Secretary-General Saurabh Sanyal said.

That comes on the heels of Prime Minister Narendra Modi’s warning that the disruptions of supply chains will significantly impact the global economy in a Commerce Ministry’s webinar.

The Ukraine conflict has increased supply concerns after aggressive and enhanced sanctions by Western countries on Russia in response to its invasion of Ukraine.

Amidst growing uncertainty in the global economy over the Ukraine crisis and disruption of trade and shipping services following sanctions on Russia, the Brent crude oil futures jumped to within a whisker of $ 120 before easing back to around $ 114. 

That is all set to significantly increase India’s import on crude oil in the coming weeks as the country depends on imports for over three-fourths of its energy needs.

But, as said above, the fuel prices would have increased after 31 March even without the Russian-Ukrainian situation.

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