A phenomenal 20 per cent hike in fuel prices – oil, natural gas and coal – projected by World Bank with its cascading effect on commodity prices is going to hit the people hard this year.
According to the Bank’s April commodity markets outlook, oil prices will average $65 a barrel through 2018, 22 per cent higher than the average price of $53 in 2017, due to the combined effect of production cut by Opec and Russia — the largest exporter outside the grouping of 14 oil exporting countries — and an uptick in demand, said a Times of India (TOI) report.
India needs to import 80 per cent of its crude oil to meet its fuel requirements. Petrol and diesel prices are already touching record levels in the country.
Though the global benchmark crude slipped 1 per cent on Wednesday as apprehensions over US sanctions on Iran eased a bit after Tuesday’s talks between the US and French presidents, other factors contributing to high oil prices still remain at play, said the TOI report.
The government expects the oil import bill to rise 20 per cent from $88 billion in 2017-18 to $105 billion in the current fiscal, at an average crude price of $65 per barrel. This is 64 per cent higher than $64 billion in 2015-16 when prices were practically in a free fall.
The government did not pass on the benefit to consumers, though. The government used this window to mop up additional resources for welfare schemes by cumulatively raising excise duty by Rs 11.77 per litre on petrol and Rs 13.47 on diesel between November 2014 and January 2016.
In October 2017, the tax was cut by Rs 2 a litre as protests became louder over rising pump prices since August 2016 on the back of a rebound in crude. Demand for another tax cut is getting louder again.
High oil prices can upset the government’s calculations. It could be in an even tighter spot if it is forced to cut excise – the election year makes the government particularly vulnerable to this. Though the government does not buy oil or gas, their high prices become a drag on the rupee as forex outgo increases.
The subsidy bill too goes up. These factors trigger higher inflation and limit the legroom for government spending needed to push growth.