New Delhi: The Narendra Modi government’s macroeconomic challenges are getting tougher as India faces the double whammy of a strengthening dollar and a surging crude oil market. This comes at a time when the government’s fiscal position is already precarious and the next general elections are less than a year away.
State-owned oil marketing companies (OMCs) jacked up the price of diesel to an all-time high of Rs 67.82 a litre on Monday in Delhi as the global crude oil market rallied on news that the looming US-China trade war has been put on hold, keeping under pressure the rupee which opened 12 paise lower against the US dollar in today’s trading.
Petrol prices too hit a new high of Rs 76.57 a litre in the national capital.
The rupee has already depreciated by more than 6% against the greenback this year and its fortunes remain in the doldrums as crude is going strong. If forward rates are anything to go by, the rupee could breach the psychological mark of $70 against the dollar by the end of next February.
In the run-up to the Karnataka election, OMCs had kept daily price revision for petrol and diesel on hold.
They now need need to raise petrol prices by Rs 4.6 per litre, or 6.2%, and diesel rates by Rs. 3.8 per litre, or 5.8%, just to make up for losses incurred by them when price hikes were on hold, says brokerage Kotak Institutional Equities. That means more pain for millions of middle-class Indians.
Most of this rise in prices is due to high excise duties levelled on fuel. The Modi government raised excise duty by nine times during 2014 and 2015, taking advantage of low oil prices in the international market. However, it appears in no mood to reduce high taxes to provide relief to auto fuel consumers.
The back of a truck carrying petroleum in Bhubaneswar, Odisha. Credit: proxyindian/Flickr, CC BY 2.0
Economic affairs secretary Subhash Chandra Garg had said last Friday the government was watching the situation developing from oil prices hitting $80 a barrel and adequate steps would be taken. But when asked if the government would cut excise duty on petrol and diesel, he evaded the question.
Over the weekend, petroleum minister Dharmendra Pradhan also moved to assure that the government will soon come out with a mechanism to cushion the impact of rising crude price on auto fuel consumers.
“Various alternatives are being looked at,” Dharmendra Pradhan said in a televised speech, without sharing details on what arrangement his ministry is working on to protect retail fuel consumers.
Before fuel prices were deregulated, upstream oil companies were required to share OMCs’ under-recoveries on retail sales of petrol and diesel. If the government revives the old arrangement of under-recovery sharing, it would be a big setback to fuel market reforms.
On Monday, industry lobby group FICCI called for an immediate cut in the excise duty on oil imports.
On Monday, US crude futures rose 0.8% to $71.83 per barrel, near last week’s three-and-a-half-year high of $72.30 while Brent crude futures notched up 0.8% to $79.10 per barrel, according to agency reports.
Last week, crude oil prices had briefly crossed $80 per barrel for the first time since November 2014.
Brent crude futures were at $79.13 per barrel at 0121 GMT, up 62 cents, or 0.8 percent, from their last close. Brent broke through $80 for the first time since November 2014 last week.
US West Texas Intermediate (WTI) crude futures were at $71.83 a barrel, up 55 cents, or 0.8%, from their last settlement.
The US trade war with China is also “on hold” after the world’s largest economies agreed to drop their tariff threats while they work on a wider trade agreement, US treasury secretary Steven Mnuchin said on Sunday, giving global markets a lift in early trading on Monday.
“The temporary trade dispute will de-escalate over time through negotiation,” US bank Morgan Stanley said.
“Both sides plan to work on implementing agriculture and energy purchases and to continue to negotiate on manufacturing and service trade, bilateral investment and intellectual property protection in coming months,” it added.