With global crude oil prices rising 40% since January this year, there are fears that higher fuel prices may once again increase under-recoveries of oil marketing companies, bloat India’s import bill and stoke retail inflation.
A collapse in global oil prices has largely helped the Narendra Modi government to rein in inflation but it may dramatically reverse within months if the current rise in crude prices continue.
A Citi Research note points that a 10% change in crude prices impacts consumer price inflation by 20 basis points assuming no change in taxes. A possible acceleration in inflation could also make it harder for the RBI to cut interest rates and lower cost of capital for industry and consumers.
Rising fuel prices will also dent the balance sheet of oil marketing companies, who have seen some respite last year. In FY15, gross under-recoveries almost halved to R72,314 crore from the year before as crude prices collapsed over 18% and the government de-controlled diesel prices in October 2014 after increasing the retail price of the fuel by 50 paise every month from January 2013. The problem though remains with domestic LPG and PDS Kerosene. To be sure, losses per LPG cylinder—which now accounts for the bulk of the under-recoveries—dropped to R403 in FY15, or a savings of R68 from the previous year. Increase in crude price could nullify most of the previous year’s gains.
While the government’s efforts to include more people under the direct benefit transfer of cash subsidy in bank accounts will help end black marketing, it must follow the UPA’s diesel model for increasing the prices of LPG and and kerosene every month by a token amount.