What will it take for Modi govt to blink on fuel prices?

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New Delhi: With state-run oil marketing companies continuing to increase automobile fuel prices, the Narendra Modi government has held its nerve by not intervening in the backdrop of an international crude oil price rally.

With the daily price change back in play since 14 May, the government’s politically sensitive decision is in sharp contrast with the earlier National Democratic Alliance (NDA) that was unwilling to implement the full fuel price deregulation in 2002.

With the government maintaining that it has got no role in pricing, its position was best articulated by petroleum minister Dharmendra Pradhan, who on 2 April ruled out a rethink on free market pricing. The dynamic fuel pricing was introduced in June last year, wherein fuel prices change daily depending on global oil price fluctuations. Pradhan said there won’t be any “knee-jerk reaction” with the government balancing the twin goals of development and consumer’s interest.

To be sure, these state run firms—Indian Oil Corp. Ltd (IOCL), Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd (HPCL)—refrained from increasing prices and paused it for 20 days while the Karnataka election campaign was going on.

In response to Mint’s query on 1 May, Indian Oil in a 17 May statement said, “Post deregulation of petrol and diesel prices in June 2010 and October 2014 respectively by way of Government of India notifications, Indian Oil Corporation Ltd independently decides retail selling prices of petrol and diesel based on trend of gasoline and gasoil prices in the international market, rupee-dollar exchange rate, volatility of international and domestic market condition, competitor’s prices of petrol and diesel etc. Considering all these factors, Indian Oil Corporation Ltd decided to keep petrol and diesel prices temporarily unchanged since 24th April till further review.”

The daily price revision is back, with diesel and petrol prices on 22 May reached Rs68.08 per litre and Rs76.87 per litre respectively in Delhi, a record high. With the government staying its course, there has also been a growing demand for excise duty cut on petrol and diesel.

Given its role as a major energy consumer, India has also expressed its concerns to Saudi Arabia, the world’s biggest oil producer about “rising prices and its negative impact on consumers and the Indian economy.”

It was the United Front government led by Prime Minister I.K. Gujral that set in motion the dismantling of administered price mechanism (APM) in November 1997, the idea for which was first proposed during the Congress government led by Prime Minister Narasimha Rao. While the Congress-led United Progressive Alliance government revived the idea in 2004; with the petrol prices being deregulated in June 2010, it was the Narendra Modi government that decontrolled the diesel prices in October 2014.

The real test now follows with the global crude oil prices hardening. Any advance in global markets is bound to impact India’s oil import bill and trade deficit, given that India is the world’s third largest oil importer. Oil imports rose by over 25% in FY18 to $109 billion from a year ago.

The alarm bells have started ringing with cost of the Indian basket of crude, which averaged $47.56 and $56.43 per barrel in FY17 and FY18, respectively, rose to an average of $69.30 in April 2018, according to data from the Petroleum Planning and Analysis Cell (PPAC). The price was $77.43 a barrel on 18 May. The Indian basket represents the average of Oman, Dubai and Brent crude.

The spike in oil prices is due to a combination of factors such as President Donald Trump pulling the US out of a 2015 historic accord with energy-rich Iran, Opec and Russia cutting supplies, falling production in Venezuela and geopolitical tensions.

The government however remains confident with India’s economic affairs secretary Subhash Chandra Garg last Friday stating that India’s oil import bill may go up in the range of $25-50 billion in fiscal year 2019 (FY19) if oil prices remain high, but this will not impact the country’s macroeconomic stability.livemint