Need for a better remedy
The Centre on Thursday announced a cut in fuel prices by Rs 2.50 per litre and asked the states to take similar steps to bring down the soaring oil prices, which have hit an all-time high in most cities of the country. The Central government had maintained that it would not try to control the fuel prices, which are determined by Oil Marketing Companies based on the procurement cost and taxes levied by the Centre and the states. Responding to the call of the Centre, most of the BJP-ruled states like Gujarat, Chhattisgarh, Uttar Pradesh, Tripura and Maharashtra too have reduced the taxes on petrol and diesel by Rs 2.50 per litre, making them cheaper by Rs 5 in these states. While the fuel prices going down by Rs 5 per litre is a major relief to the consumers, the government's decision to reduce the taxes and pass on the benefits to the consumers can at best be a one-time intervention. The Rupee's slide is continuing unabated and crude oil prices are surging in the international markets making it impossible to keep the fuel prices stable. In the short-term, the fuel prices are likely to keep going up as the crude oil prices have breached the $80 per barrel mark and are headed to $100 per barrel. For the past few months when oil prices started moving up from a level of $60 per barrel, the Centre did not wish to cut the excise duty on petrol and diesel and keep the prices down even though some of the state governments like Kerala and Andhra Pradesh had reduced the taxes, bringing down the petrol and diesel prices by Re 1 and Rs 2 respectively.
The rising crude oil prices in the international markets coupled with unprecedented depreciation of Indian Rupee has inflated the oil bill much beyond the budgetary estimates and caused the current account deficit to widen. The combined effect of the two factors seems to have hit the Indian economy hard. The soaring fuel prices have started to affect inflation, which is likely to grow from its current under 4 per cent level. People have already started facing the heat of price rise across commodities and sectors. In these circumstances, the Central bank is expected to hike the interest rates so that inflation does not shoot up, which in turn will hit the lending capacity of the banks and ultimately the growth rate of the economy. The government will certainly not like to see the economy's growth tumbling from a level when India is considered the fastest growing economy in the world. There is a lot at stake for the government and a hike in the interest rate by RBI may not be the best remedy for the problems being faced by the Indian economy.
The effects of soaring crude oil prices and a weaker rupee are also being seen on the stock markets. In the past few weeks, the sensitive index has fallen by nearly 2,000 points as foreign investors have been pulling out their money from the Indian bourses. The Centre believes that the economic fundamentals of the country are strong and the economy can very well withstand the impacts of rising crude oil prices and weakening Indian Rupee. But when fuel prices shoot up and make other commodities more expensive in the market due to a rise in transportation cost, it can also trigger public anger against the government for not doing enough. This may not be a good news for the government in a year when a number of states are going to polls while the most important Lok Sabha elections are less than a year away.
Opposition parties have already started raising their voices against the constant rise in fuel prices. Congress had called an all India-strike on the issue while other opposition parties have also organised protests and strikes in different states. At this moment, it does not seem likely that the rising oil prices may emerge as one of the most important issues in the forthcoming elections but by the time the upcoming elections are actually held, the oil prices may have crossed $100 a barrel mark, making petrol and diesel costlier by another Rs 20. The government may choose to reduce the taxes and keep the oil prices under control but that does not seem to be a possibility, given the stress it may cause to fiscal estimates and planning. The government has taken some initiatives to lend strength to the Indian Rupee such as increasing the import duty on certain non-essential items. Expecting the Indian Rupee to show more resilience is the only option that the government can rely on as there is little chance of crude oil prices falling.
