The fuel price conundrum

Retail consumers in India are bracing for a fresh bout of inflation following an increase in prices of petrol and diesel for bulk purchases as well as retail prices. The northeast region, which depends on supplies from other states to meet its demand for essential commodities, is looking at spiralling retail inflation if international crude prices continue to surge amid the Russia-Ukraine conflict. With bulk purchasers shifting to retail outlets to source petrol and diesel to dodge the hike, public sector Oil Marketing Companies (OMCs) are poised to face unprecedented challenges in replenishing fuel stock at their petrol pumps. Freeze on fuel price hike by OMCs for the past over four months despite volatile crude oil prices kept inflationary pressure under check. Eighty per cent of India's crude oil basket is filled through import. International crude oil prices have increased to 114 US dollars a barrel as against 81-82 US dollars a barrel in early November when prices were frozen which has compelled the OMCs to increase prices of petrol and diesel by Rs 25 for bulk purchases and by 80 paise for retail sale at petrol pumps. If bulk purchasers like public sector transport companies, malls, factories that source their fuel directly from OMCs continue to rush to petrol pumps to refuel to meet regular demand, the OMCs will not stand to gain from a hike at prices against bulk purchases and make up for the losses. The bulk purchasers usually source diesel tankers directly from OMCs. The OMCs resorting to more hikes in retail fuel prices in such a situation to break even cannot be ruled out. Private petrol and diesel retailers are apprehending closure of their retail outlets if public-sector OMCs continue to hold retail prices at petrol pumps. If the private retailers hike the rates of petrol and diesel when Indian Oil Corporation, Bharat Petroleum Corporation Limited or Hindustan Corporation Limited keep it under check then the fight of consumers from private outlets to petrol pumps of OMCs may force the private retailers to shut down their pumps as in 2008. The public sector OMCs account for 90% of petrol pumps and the Central Government is wary of a steep hike in retail price triggering widespread resentment and would like the OMCs to hold retail prices as much as possible. One option of preventing bulk purchases from shifting from OMCs to petrol pumps could be resorting to a regulatory measure of prohibiting the sale of petrol and diesel in bulk quantities at petrol pumps but such a measure will only add to resentment. Tamil Nadu State Transport Corporation has suspended the bulk purchase of diesel from OMCs and moved to refuel its fleet of state-run transport buses at IOC retail outlets. The state-run transport operator in the southern state makes the bulk purchase of about 16 lakh litres of diesel a day to operate its fleet of 21,700 buses and a hike in the bulk purchase price is not going to bring any extra money which the IOC expected to earn to make up for under-recoveries. If transport fleet operators are compelled to buy at prices fixed for bulk purchases, then they will have no option but to pass on the cost to commuters through a hike in passenger fares to prevent the accumulation of more losses. A further hike in passenger fares will make life tougher for daily commuters who are grappling with the post-pandemic economic downturn. A hike of Rs 50 pushing the price of an LPG cylinder closer to the Rs 1000 mark and high food inflation burning holes in consumers' pockets and a fresh bout of inflation is going to make life tougher for ordinary citizens. The Central government reduced excise duty on petrol and diesel in November last year when international crude oil prices were rising and triggered inflation and other tax revenue sources improved with unlocking from COVID restriction. The size of expenditure on subsidies standing at Rs 2.31 lakh crore, there is a little window for the government to cut excise duties on petrol and diesel which are still higher than the pre-pandemic level. An excise duty cut on petrol and diesel to pre-pandemic level can facilitate OMCs to hike retail prices and simultaneously provide the cushion to consumers against price shocks if bulk price hike fails to work and the majority of buyers turn to retail outlets to refuel. The rupee weakening against the dollar has compounded the disruption caused by the surging global crude price. With uncertainties in the global crude market over the Russia-Ukraine conflict raising the supply risk, the volatility is not going to be over so soon and may only worsen further. For ordinary consumers, there can be no escape from high retail inflation as OMCs holding retail petrol and diesel price hikes for long have become unsustainable. The Central government is walking a tightrope between fuel price hikes and excise duty cuts.