As a political strategy, the Modi government had deliberately chosen not to raise fuel prices in the run-up to the recent round of assembly elections. Post-elections, however, it chose to bite the bullet after oil marketing companies started bleeding. With petrol and diesel prices being raised by Rs3 per litre, marking the first major fuel price hike in nearly four years, as global crude oil prices surged amid escalating tensions in West Asia, economists fear this may only be the beginning of a price spiral if crude oil prices remain elevated.
Brent crude oil price remains firm at about the $110-per-barrel mark, raising concerns that India could be entering another phase of fuel-led inflation pressures – one that could gradually spread from fuel stations to kitchens, delivery bills, transport fares, shopping budgets and even employment conditions. The return of higher fuel prices has raised the spectre of inflation haunting the Indian economy.
The immediate impact of a fuel price hike is visible at petrol pumps. But the deeper impact takes longer to appear and spreads much wider through the economy. Fuel prices influence far more than just commuting costs in India.
Diesel powers the trucks transporting vegetables, fruits, grains, medicines, milk, consumer goods and industrial supplies across the country. It also fuels tractors, irrigation pumps, mining operations and large parts of India’s logistics network. When diesel becomes more expensive, transportation costs begin rising across supply chains. Businesses initially absorb some of the burden, but eventually many pass the costs on to consumers through higher prices. “The hike will raise inflation by increasing transportation and production costs, thereby increasing prices of essential goods,” says Manoranjan Sharma, chief economist, Infomerics Ratings.
For households, this often means that the effects begin showing up slowly but steadily – slightly costlier vegetables, higher milk prices, increased courier fees, more expensive packaged foods and rising transportation fares. The pressure is building at a particularly difficult time for households because food prices are already vulnerable to summer heat. Besides, uneven rainfall patterns and weather disruptions could affect crop output and supplies in the coming months.
Economists say consumers may soon start paying more not just for vegetables and packaged foods, but also for restaurant meals, grocery deliveries and app-based food orders, if fuel prices remain elevated for long. India has already started seeing early signs of these pressures, and the inflation situation could get worse if fuel prices keep rising.
Keeping inflation under control
The timing of the fuel price hike is significant because the government and the RBI had spent the past two years gradually bringing inflation pressures under control after the sharp post-pandemic commodity and energy price surge. Now, rising crude oil prices threaten to reverse part of that progress. Retail inflation had eased considerably over the past year, helped partly by softer food and fuel prices, raising hopes that price pressures across the economy were gradually stabilising.
However, economists warn that a sustained rise in crude oil prices could complicate that outlook again by feeding into transportation, manufacturing and food costs simultaneously. “This was a long-anticipated move in light of the sharp rally in global crude prices and rising burden of these costs on domestic oil marketing companies as well as the fiscal books,” says Radhika Rao, senior economist & executive director, DBS Bank. According to DBS Bank estimates, a 3-5 per cent increase in petrol and diesel prices could add 15-25 basis points to headline inflation, apart from broader second-round effects across sectors.
Several economists now expect inflation projections for the second half of the financial year to come under renewed pressure if Brent crude prices remain close to the $100-110-per-barrel range for an extended period. Those ‘second-round effects’ are what economists watch most closely.
Even government economists agree that when fuel prices rise, companies across industries often begin increasing prices pre-emptively because they anticipate higher future transportation and operating costs. Over time, this creates a wider inflation cycle affecting everything from groceries and online deliveries to manufacturing and retail prices.
Prime Minister Narendra Modi has already warned the people of the economic hardships they may have to face if the Iran war flares up and supply disruptions escalate. He has suggested a series of austerity measures. But the finance ministry and the RBI are worried. Their worries were till now limited to the falling rupee, which has hit an all-time low and slowing growth. Now there is the worry of possible stagflation also. Some economists expect the RBI to reassess its inflation projections and even raise policy rates on concerns of rising inflation.