Fuel Prices Could Skyrocket Post Elections – Consumers In for a Rude Shock

Aslam Perwaiz, Wepen, Apr 29, 2019: One of the challenges that the next government will have to grapple with is the citizen’s ire resulting from exorbitant fuel prices, post declaration of general election results.

There has been a surge in global oil prices this year with price hitting US$80 a barrel in May for the first time since 2014.The high prices are direct consequences of  Oil Producing And Exporting Countries (OPEC) led output cuts, falling Venezuelan and Libyan output and imminent drop in Iranian export as a result of US sanctions.

The exports from Iran are expected to drop from 2.5 million barrels a day to about 1 million barrels thereby creating a significant shortfall in world supply.

Contrary to the trend in global prices, the prices in India have been allowed to lag. The State run fuel suppliers and retailers have held off, passing on to the consumers the increase in costs of crude during the staggered general election.

The polls started on April 11 will end on May19 with the results slated for May 23.

The prices are expected to be synchronised with global trends once the election is over. There could be additional price increases to compensate for costs incurred or profits missed during the period of price freeze.

In some major Asian countries like Japan and South Korea pump prices are allowed to move in tandem with the global crude prices. That was the system in India too till just before the elections. Since the commencement of elections there has been a moratorium on prices.

When crude prices have increased by US$8 a barrel or about 12 percent over the past six weeks the fuel prices at the pumps have risen by about 0.50 or 0.6 percent.

“State controlled fuel suppliers and retailers have declined to explain why they have refused to synchronise their prices with the global trends and refused to say whether they had kept the prices steady acting on government instructions,” said a source associated with a citizens’ forum.

The opposition parties have been clamouring that the Modi government is violating it’s own policy of daily price revision by directing the state owned oil companies to hold the prices steady till after the elections.

Nitin Goyal treasurer of the All India Petroleum Dealer’s Association representing petrol stations in 25 states said diesel and petrol prices were similarly held steady for 19 days in Karnataka last year during the Assembly election only to shoot up post election.

“Consumers should be ready for a rude shock of massive rise in retail prices of fuel similar to the one seen after the Karnataka election,” prophesied Goyal.

Paravaikkarasu, Director of Asia Oil, a Singapore based consultancy FGE said retail prices of gasoline and gas oil prices would have been 6 percent or about 4 percent higher if they had been allowed to rise in line with the global prices.

“Indian pump prices have failed to keep up with the recent up-trends in global crude prices. With the country’s general elections underway the incumbent government has been keeping pump prices relatively unchanged,” Parvaikkarasu said.

India had switched to a daily price revision in June 2017 from a revision every third week as the government allowed retailers to set prices.

However the government had to face vehement countrywide protests last October when retailers raised prices by upto Rs10 a litre after crude prices crossed $80 per barrel forcing it to cut fuel taxes.

Global prices rose to their highest level in 2019 on Thursday, days after United States announced that all Iran waivers would end from May1.

Economists are of the view that Indian economy would be hard hit by the higher oil prices. Growth rate could go down to less than 7percent this fiscal. Growth had slowed to 6.6 percent for the quarter ended 31 December, the lowest in five quarters.

Rating agency CARE has warned that a 10 percent rise in crude prices could increase demand for dollars thereby further pressurising the rupee and widening the trade deficit.

“The net  trade oil deficit has widened considerably owing to a combination of higher oil prices and a weak Rupee,” said DBS  economist Radhika Rao. She said that the oil import bill for fiscal year could well spike to $114 billion.The oil import bill for fiscal year 2018 was $88 billion.

“The increase in international oil prices is a credit negative for the Indian economy. Every $10/bbl increase in crude prices increases the fiscal deficit by about 0.1 percent of GDP,” ICRA the Indian arm of the Fitch rating agency said in a note.

The Reserve Bank of India’s Monetary Policy Committee which cut the benchmark Repo rate by 25 basis points this month said that rising oil prices coupled with increase in food prices could push up inflation.

Citing UBS research, an Economic Times report states,”10 percent rise in crude prices could increase CPI inflation by around 25 basis points if the OMC’s were to pass on the full increase to consumers and if there is no excise duty cut.”

Policy framers are worried that a sustained  increase in international oil prices in the band of $70 to $80 per barrel can move the Rupee down by 3 to 4 percent on annual basis. The rupee has depreciated by 1.24 percent against the dollar since a year high in mid March.