Fuel prices hitting record highs have been a cause for concern since the past few months, so much so that it is now eating into essential consumption expenditure of the common man, says a report by the State Bank of India’s (SBI) economic research team.
The report notes that a surge in prices of petrol and diesel is making people spend less on other non-discretionary items like grocery, health, and utilities, thereby crowding out their demand.
Petrol has crossed the Rs-100-a-litre mark in more than one and a half dozen states and union territories (UTs), while diesel is being sold at over Rs 100 a liter in Rajasthan and Odisha.
As a result, expenditure on fuel consumption has jumped to 75 percent in June from 62 percent in March.
Impact on inflation
The report warned that spending more on fuel can have an adverse impact on inflation numbers.
Retail inflation based on the consumer price index (CPI) for the month of June came in at 6.26 percent, thereby breaching the upper end of the Reserve Bank of India’s (RBI) comfort band for the second straight month.
CPI inflation moderated slightly in June from 6.3 percent in May, while core inflation also eased marginally to 6.16 percent from 6.4 percent in May.
According to SBI’s calculations, with every 10 percent increase in petrol prices (Mumbai), there is a 50 basis points (bps) rise in CPI.
Inflation impact on household savings
The report further notes that even though inflation has shown a marginal decline, the levels are still elevated and led to a fall in financial savings, thereby adding to household challenges.
As per SBI estimates, during the second wave period (March-June), the number of districts with deposit outflows almost doubled than the first wave.
The overall data of ASCB deposits indicates that during in Q1FY22 (till June 18), deposits declined by 38 percent, compared to the growth seen during Q1FY21.
This clearly indicates a rising level of household stress.
Demand for tax rationalization
The rising impact of fuel rates has led to a demand for an urgent cut in oil prices through tax rationalization.
As per estimates, over Rs 40 per liter goes as taxes and excise to governments at the Centre and states.
If taxes are not rationalized then consumer’s non-discretionary spending will continue to get distorted and crowd out discretionary expenses, SBI said.
This will also impart an upward bias on inflation.
International oil prices
With international fuel prices rising by $6 per barrel between May and June, the report said that the future outlook hinges on production increases by Opec+.
The rebound in international oil prices from lows hit in May on the back of demand recovery has sent petrol and diesel rates to a record high in India.
Besides, taxes were increased when the global crude prices had dropped but have not been rolled back even as crude prices have rebounded.
Production cuts by Opec and allies have further led to curbs in supply and a rise in oil prices.
India which imports 85 percent of its oil needs, has long pressed producers’ cartels to phase out its production cuts and allow oil prices to come to reasonable levels. But to no avail.
India and Opec
India is the world’s third-largest consumer of crude and Opec nations such as Saudi Arabia have traditionally been its principal oil source.
But Opec and Opec+ ignoring its call for easing of supply curbs had led India to tap newer sources to diversify its crude oil imports.
As a result, Opec’s share in India’s oil imports dropped to about 60 percent in May from 74 percent in the previous month.
The two sides have somewhat patched up relations, with Saudi Arabia and the UAE supplying critical medicine, oxygen, and equipment to help India battle its second wave of coronavirus infections.
(With inputs from agencies)