Higher petroleum product prices carry the danger of fuelling the inflation rate further up as a worried government grapples with policy options to contain a runaway price line in an election year.
Petroleum Minister Murli Deora said the fuel price hike announced on Wednesday would directly push up the inflation rate, which has already crossed 8 per cent, by at least half a percentage point.
Then there is the cascading impact. Higher fuel prices will likely result in higher truck rentals, rail freight and energy costs for producers. That in turn could drive up prices of a variety of goods and add to inflation.
“A Rs 3 per litre rise in diesel prices would result in about 5 per cent higher transport cost,” SP Singh, senior fellow, India Foundation for Transport Research and Training (IFTRT) said. The fuel cost of a Delhi-Mumbai-Delhi round trip would now go up by about Rs 2,100, he said.
“We are staring at an inflation rate of over 9 per cent, but the price hike was inevitable,” Delhi-based economist TK Bhaumik said.
The Reserve Bank of India (RBI) in its latest report on macro-economic and policy developments said “inflation risks on account of oil prices remain incipient.”
India imports about 70 per cent of its total crude requirement and government faces the twin challenge of containing import and subsidy bills while maintaining retail fuel prices at reasonable levels in an election year.
India’s oil imports during the last fiscal year (April- March 2007-08) were valued at $ 77.03 billion and stood at $ 8.02 billion in April this year—up 46.2 per cent as compared with $ 5.49 billion in the corresponding month last year.
Given that oil is a key input in most production processes, it rising cost would eat into manufacturers' margins, dent their future investments and impact growth.
Still, most business groupings in the country welcomed the move, saying the price hike was inevitable and would give a much-needed boost to oil companies that had begun to shelve their future expansion plans because of a cash crunch.