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The steep rise in fuel prices comes at an inopportune time for the Narendra Modi-led National Democratic Alliance government, which completed four years in power last week. Petrol and diesel prices have been on a tear over the last couple of weeks, and continue to climb even as global prices have begun to ease.
An unchecked rise in retail fuel prices will feed into inflation before long, and with the general election barely a year away, the government faces a difficult choice.
Should crude prices continue to rise, the government will have to decide between taking a hit on its own revenue from fuel, and burdening oil marketing companies by asking them to absorb the higher prices. Simply passing on higher prices to consumers will certainly hurt its prospects in the election next year.
A persistent complaint against the Modi government has been that consumers have not received the full benefits of falling crude prices in the past, but have to shell out more when crude prices rise.
When prices were falling, the government kept hiking excise duty on fuel to make up for the fall in revenue, since taxes on oil are levied as a percentage of its price. So when oil prices fall sharply, the government's import bill shrinks, but its revenue declines too.
Whether deliberate or not, oil marketing companies had suspended the dynamic fuel pricing system at the start of the month, only to resume it two days after the Karnataka election concluded on May 12. Since then, oil marketing companies have hiked fuel prices for 16 consecutive days.
Critics of the government say fuel prices were kept in check to woo voters in the southern Indian state.
During his electoral campaign in 2014, Prime Minister Modi had attacked the Congress on rising fuel prices back then and said that under the BJP’s rule, people would witness a steep decline in petrol and diesel prices, and the rupee-dollar exchange rate. But, truth be told, the PM has clearly failed on this front.
Global crude prices have been on an uptrend since the start of the year, thanks to the Organization of the Petroleum Exporting Countries (OPEC). This meant that the government had to follow suit at some point and hike domestic prices. However, as Russia and the oil cartel agreed to increase supplies, crude prices have eased off considerably.
Brent crude was up 31 cents at $75.61 a barrel early on May 29. It had previously settled at $75.30, which was its lowest since May 8.
On May 29, the price of petrol was hiked by 16 paise to Rs 86.24 per litre in Mumbai, while that of diesel was hiked by 15 paise to Rs 73.79 per litre. In the national capital, petrol price was increased by 16 paise to Rs 78.43 per litre, and that of diesel was raised by 14 paise to Rs 69.31 per litre.
Since the dynamic pricing system resumed on May 14, petrol and diesel prices have risen by Rs 3.80 and Rs 3.38, respectively, in Delhi.
Failure to curb prices
On May 25, Road Transport and Highways Minister Nitin Gadkari had suggested that petrol and diesel should be brought under the Goods and Services Tax (GST) regime to curb the rise in price. Petroleum Minister Dharmendra Pradhan had also said that the government will intervene to reduce prices. However, nothing has been done so far to reduce the burden on the common man.
What experts say
"If you look at the way stock markets have performed, oil marketing companies have underperformed. This is because the market doesn’t believe that the decrease in prices in global crude, would be passed on [to customers]," said Sreesankar Radhakrishnan, Co-head - Equities at Prabhudas Lilladher.
"Moreover, the government has been pretty clear on pricing and is unlikely to reduce excise, which is one factor why oil marketing companies could continue to underperform," he said.
In a recent analysis of crude oil prices, BNP Paribas said, "Given our baseline estimates of robust demand growth and moderate supply growth we expect the global crude oil market to remain in deficit for the remainder of 2018 and potentially into 2019."
"Demand could disappoint, notably in the non-OECD bloc which accounts for slightly more than half of global demand. The second principal risk, in our view, is higher-than-expected inflation, notably in the US. This could reflect strong growth which is supportive for crude demand, but also would involve tighter Fed monetary policy and a strong US dollar.
"We find it difficult to see Brent crude prices materially above $80/bbl (close to current spot prices) in such an environment. As such, we believe the risk/reward for crude prices is currently skewed to the downside."