Rising Petroleum Prices Test People’s Patience

By Anjan Roy

The country’s patience is being tried by the rising price of petroleum and diesel. As the prices are scaling higher, the one question almost on every lip is: what is the government doing? Can’t the price be brought down? The rising prices are being encashed by the politicians. The all-time buffoon among them, Derek O’Brien, was heard screaming on TV discussion sets “It’s a loot, it’s a loot, it’s loot”.

But he was careful about underlining the exact nature of the loot: the central government’s take by way of excise duty on petrol and diesel has gone up, while carefully not mentioning what his party’s government was charging as state duty on petrol and diesel.

Leaving aside such cheap tomfoolery, the fact is that the final prices of both items have increased hugely over the last one year. The retail price of petrol is hovering around Rs80 per litre. Diesel price is equally high. Being now allowed to fluctuate in step with the imported price of petro products, the prices have proved to be inconveniently volatile.

There are three aspects of the situation which deserve to be highlighted. First, despite the sharp rise in price of diesel and petrol, consumption is rising as if the rising prices do not matter. The crude oil import bill is surging and India is one of the key players whose demand now influences the global oil prices. The 2017-18 import bill is set at $88 billion (March 2018). The current fiscal year bill for oil import is projected to go up around $120 billion if the current rate of imports is maintained. This is clearly unsustainable and India will face a payments crunch.

Secondly, the price of crude oil is rising on the global markets for a variety of reasons, including the US stance on Iran nuke deal and imposition of sanctions on Iran’s oil sales. Suddenly, a situation of surfeit on the market has turned into a shortage. The Indian crude oil basket price had hovered around $47.5 per barrel in 2016-17, was on average $56.5 in 2017-18 and touched $73 per barrel in April-July this year. Price is going up in spurts, as US is swinging into some action on sanctions.

Thirdly, compounding the crude oil price hike is the depreciation of the Indian rupee over the last one year, which is having a far sharper impact on the domestic retail price. The rupee has depreciated from around 63.88/90 in September last year to over 71 to a US dollar at present. This itself is a major burden and is pushing up prices. The rupee import bill will rise by no less than Rs2.5 lakh crore over last year. Such massive burden cannot be carried on government budget.

There is the no alternative to letting the retail price float and recover the costs. On top of that is the abject dependence of state governments on revenues from petrol and diesel taxes. Fortunately, this has not come at a time when the domestic economy is in dire straits.

The lethal combination of a falling rupee with rising crude oil prices could be said to have come not in an inopportune time for India. This might sound absurd in the current context but still it is true. Whenever these two phenomena come together, like astrological conjoint movements of planets, the results will be unpleasant. Prices in the final count will rise disproportionately high. But it has come when we are not as much vulnerable to the combined forces.

One indication is that despite the spike in prices, we are not too uncomfortable. There is some bit of dismay about the fast moving prices. But it is not as if worth a protest even. We can take the rise in our stride. That is possible because the economy is in other ways growing and at a reasonable pace. Disposable income is rising and people can take the rise, as it affects them without too much of a grouse.

But there are still smouldering causes for concern. Primarily because the oil consumption volume is rising too fast and our import dependency is mounting. As the government is talking about reducing import dependency for energy, the proportion of imports to total consumption is rising.

In the last four years since 2014, import dependency has gone up by close to 10 percent and that is a huge burden. This is becoming a burden physically as well as financially. Our domestic oil and gas production has proved sluggish and has not risen. In fact, it is falling marginally. Conventional hydrocarbons production has not increased. And despite some encouraging prognostications about the presence of shale reserves, we have not made any progress on exploiting any of these resources.

Financially, meeting an import bill of around say $100 billion would be a drag. Our exports are not rising in the face of global trade crises. On the other hand, in line with other emerging market economies, India is witnessing withdrawal of funds by foreign institutional investors. So the prospects of plentiful exchange resource would be a far cry.

It would be imperative to strike a balance between rising consumption and solvency in external payments. That could possibly be reached by keeping prices high and recovering the true costs of imports. (IPA Service)