A Huge Challenge For Whoever Wins India Election Will Be Fuel Prices

Surging global oil prices will pose a first big challenge to India's new government, whoever wins an election now under way, especially as domestic prices have been allowed to lag, meaning consumers are in for a painful surge as they catch up.

For the oil-import dependent country, higher global prices could lead to a weaker rupee, higher inflation, the ruling out of interest rate cuts and could further weigh on twin current account and budget deficits, economists warned.

But compounding the future pain, state-run fuel suppliers and retailers have held off passing on to consumers the higher prices during a staggered general election, which began on April 11 and ends on May 23, according to sources familiar with the situation.

That delay is expected to be unwound once the election is over. And there could be additional price increases to make up for losses or profits missed during the period of delayed increases, the sources said.

In some major Asian countries, such as Japan and South Korea, pump prices are adjusted periodically so they move largely in tandem with international crude prices.

That was what was supposed to happen in India but the election means there have been many days when pump prices have been unchanged.

In New Delhi, for example, while crude oil prices have gone up by nearly $9 a barrel, or about 12 per cent, in the past six weeks, petrol prices have only risen by 47 paise a litre, or 0.6 per cent.

State-controlled fuel suppliers and retailers declined to say why they had delayed price increases, or discuss whether there has been any pressure from the government of Prime Minister Narendra Modi.

A government spokesman declined to comment.

The opposition Congress party said PM Modi's government was violating its own policy of daily price revision by advising the state oil companies to hold prices steady.

"The government should cut fuel taxes otherwise consumers will have to pay much higher oil prices once the elections are over," said Akhilesh Pratap Singh, a senior leader of the Congress party.

Nitin Goyal, treasurer at the All India Petroleum Dealers Association, representing fuel stations in 25 states, said prices were similarly held down for 19 days in Karnataka last year, when it held state assembly elections.

Only for them to surge after the vote.

"Consumers should be ready for a rude shock of a massive jump in retail prices, similar to the level we have seen in the Karnataka state election," Mr Goyal said.

'Credit negative'

Sri Paravaikkarasu, director for Asia oil at Singapore-based consultancy FGE, said retail prices of petrol and diesel prices would have been up to 6 per cent, or about Rs 4, higher if they had been allowed to rise in line with global prices.

"Indian pump prices have failed to keep up with the recent uptrend in crude prices," Ms Paravaikkarasu said.

"With the country's general elections underway, the incumbent government has been keeping pump prices relatively unchanged."

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

But the government faced protests last October when retailers raised prices by up to Rs 10 a litre after the crude oil price went above $80 a barrel, forcing it to cut fuel taxes.

Global prices rose to their highest level in 2019 on Thursday, days after the United States announced all Iran sanction waivers would end by May, pressuring importers including India to stop buying Tehran's oil.

Higher oil prices will mean Asia's third largest economy is likely to see growth of less than 7 per cent rate this fiscal year, economists said. Growth slowed to 6.6 per cent in the October-December quarter, the slowest in five quarters.

Rating agency CARE has warned that a 10 per cent rise in global oil prices could increase demand for dollars, putting pressure on the rupee and widening the current account deficit.

The country's oil import bill rose by nearly one-third in the fiscal year ending March 31 to $140.5 billion, against $108 billion the previous year.

"The increase in international oil prices is a credit negative for the Indian economy," ICRA, the Indian arm of the Fitch rating agency, said in a note.

"Every $10/ barrel increase in crude oil prices increases the fiscal deficit by about 0.1 per cent of GDP."

Any big price rise would also build a case for the central bank to keep rates steady, or even raise them.

The Reserve Bank of India's Monetary Policy Committee, which cut the benchmark policy repo rate by 25 basis points this month, warned that rising oil and food prices could push up inflation.

Policymakers are worried that a sustained increase in the oil price in the range of $70-75/barrel or higher can move the rupee down by 3-4 per cent on an annual basis.

The rupee has depreciated by 1.24 per cent against the dollar since a year high in mid-March.

($1 = Rs 70.1800)