Goi needs to hold back sharp increases in petrol diesel pump prices to avoid a demand shock
The end of the voting cycle for five state assemblies ended on a day when the international crude price touched levels last seen 14 years ago. The Indian basket of crude reached $124.27 a barrel on March 7. The increase in the price of crude has been accompanied by a slight weakening in the exchange rate of the rupee, which was trading at about Rs 76.92/$ on the same day.It poses a dilemma for GoI. The ongoing conflict in Ukraine has sent energy and commodity prices soaring, and further disrupted global supply chains. For India, it has come at a time when private consumption demand remains weak and contact-intensive sectors haven’t recovered to the pre-pandemic level.
To compound the problem, the tight grip that GoI has on PSU oil companies has meant that pump prices have remained at the same level for a while even as the cost of crude surged. Allowing oil companies to effect sharp increases in pump prices to compensate for the last few weeks will lead to a demand shock for the economy.
Therefore, it may be best if GoI absorbs some of the costs sustained by oil companies in its budget for the present. Separately, it needs to reduce central fuel taxes to insulate aggregate demand from the inflationary effect of supply disruptions. This year too, GoI and states need to tailor fiscal policies to support the economy as that is the best possible choice in the wake of the uncertainty caused by the Russia-Ukraine war.
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