Fuel price hike points to tougher measures ahead

Days after the Prime Minister’s appeal to the people to lower the consumption of petroleum products and conserve foreign exchange, steps are being taken to bring the internal adjustments needed to deal with the global energy shock. On Friday, retail prices of petrol and diesel were raised by Rs 3 per litre. Earlier, the central government had increased the customs duty on gold and silver. Considering the strain on the country’s balance of payments — both current and capital accounts are under pressure due to high oil prices and capital outflows — and the rupee’s weakness, more measures may be in the offing. As Chief Economic Advisor V Anantha Nageswaran said recently, “managing the current account credibly, financing it, and preventing further currency depreciation are the central macroeconomic imperatives of FY27”.

The fuel price hike will ease only part of the pressure. The price of India’s crude oil basket surged to $114.48 per barrel in April, and stands at $106.18 in May. The combined under-recoveries of state-owned oil companies have been estimated at around Rs 30,000 crore a month on petrol, diesel and cooking gas. This suggests that larger retail price increases are needed. The strategy, though, seems to be to stagger the hikes, which will ease the price shock to the consumer. Inflation is already edging upwards — the wholesale price index surged to 8.3 per cent in April, driven by fuel prices. This will complicate matters for the monetary policy committee when it meets next. On the other hand, the decision to raise the duty on gold is driven by the government’s belief that higher levies will help moderate avoidable import demand, easing the pressure on the external account and the currency. The numbers are staggering — India’s gold imports exceeded $70 billion during the last financial year. However, there are concerns that the higher levies could lead to distortions in the market, possibly leading to the diversion of physical supplies.

The current situation calls for tough measures. Raising the duty is, however, a band-aid solution. Reducing the investment demand for gold will need to be tackled at multiple levels. More fuel price hikes will also be needed to reflect global realities. Beyond these immediate measures, deeper, far-reaching reforms are called for to address the stress points in the economy.