Analysis: India unlikely to roll back oil policy reforms despite price pain
Surging retail oil prices in India have thrown a challenge for the government as it adds to inflation and fiscal woes ahead of elections, but New Delhi is unlikely to roll back oil policy reforms, keeping in mind the longer term health of the economy, analysts and economists told S&P Global Platts.
Any move by the central government to artificially cut retail prices of gasoline and diesel may help to fix one problem by keeping vehicle owners happy. But it will it create another, as it could potentially let the fiscal deficit target to slip, they added.
“This is a tight rope walk for the government. They have very few options,” said Dharmakirti Joshi, chief economist at CRISIL, a unit of S&P Global.
“On one hand they have to look at economic prudence that dictates that fiscal deficit target has to be met. On the other hand, high prices in a pre-election year can become a worrying factor for the government. But it is not the central government alone responsible for high prices. Even state government implement provincial taxes.”
Gasoline and diesel prices in some Indian cities have hit multi-year highs on the back of high global crude oil prices and a falling value of the rupee against the US dollar, with gasoline in New Delhi crossing Indian Rupee 80/liter ($1.11/liter), and diesel hovering around Rupee 73/liter.
The dollar/rupee exchange rate surged to an intraday high of Rupee 73.01 during on Monday, an all-time high and a 16% rise from Rupee 63.15 at the start of 2018, according to a 24-hourly US dollar/Indian rupee candlestick chart seen by Platts.
Since June 2017, state oil companies have started daily adjustment of prices of gasoline and diesel — which together account for about 60% of total oil products consumption — in line with crude oil prices. Before this move, motor fuel prices at pumps were revised on the first day and in the middle of every month.
“It’s a double whammy for the government now,” Joshi said. “In the past two years, the rupee was strengthening and crude oil prices were lower. Now, it’s just the opposite.”
Analysts said that retail prices of transport fuels were reaching a point where it could potentially take a toll on domestic consumption.
“Currency depreciation coinciding with the rise in international oil prices have led to the increase, but equally, the government’s pro-reform stance of keeping taxes intact that has led to such a sharp rise,” said Amrita Sen, chief oil analyst at Energy Aspects.
“The government is sticking to its guns despite the upcoming elections and despite significant pressure from opposition parties. This in turn will weigh on demand,” she added.
India’s domestic gasoline demand grew at 11.1% year on year in the January-July period to 16.11 million mt, from 14.50 million mt in the same period a year earlier. In July alone, demand rose 7.8% year on year to 2.31 million mt, from 2.15 million mt a year earlier.
Diesel demand rose 6% year on year to 49.16 million mt in the seven-month period, from 46.37 million mt in the same period a year earlier. In July alone, consumption rose 4.9% year on year to 6.61 million mt, from 6.30 million mt a year earlier.
“Higher interest rates are also set to weigh on car sales over the festive season, although SUV car sales are likely to remain strong. Still, with the economy doing well, gasoline demand will continue to grow but growth rates will be tempered somewhat,” Sen added.
CRISIL expects India’s GDP growth to rebound from its low base to 7.5% in fiscal 2019 because of the third straight year of normal monsoon rains, an ironing out of issues related to the goods and services tax, as well as budgetary support for the rural economy.
Analysts said that the government is unlikely to let the state oil marketing companies bear the burden of higher oil prices so early. But closer to the elections, they might let those companies share the burden of high costs — to ease the pressure on consumers.
“The government might want to keep their gunpowder dry. They might need it later,” Joshi said. “My view is that the government will keep passing on these prices for some more time and they will take it on themselves and on oil marketing companies when we inch closer to elections.”
Apart from the cost of crude, the excise duty levied on fuels by the central government and the value added tax charged by the states are the two key components which made up the retail prices of gasoline and diesel in India.
“As such, the two components would come under the spotlight for adjustment when fuel prices continue to rise,” said Lim Jit Yang, director for Asia at Platts Analytics. “Another more drastic measure would be to engage the public sector undertakings, many of which have been enjoying high profitability, to carry part of the burden,” he added.