Petroleum price spike and crash: The crisis that wasn’t
Between January and October this year, the price of petrol increased by 20% reaching at all time high of Rs 84/litre in Delhi, triggering speculation of it even reaching triple figures.Updated: Dec 25, 2018 07:34 IST
Low oil prices were the biggest economic windfall for the Narendra Modi led NDA government when it assumed office in May, 2014. The average price of India’s crude oil basket (COB) fell from $106/barrel to $46/barrel between 2013-14 and 2015-16. This allowed the government to reap fiscal gains without having to worry about inflation. An analysis by Tadit Kundu published in Mint showed that almost the entire reduction in fiscal deficit in the first half of the present government’s tenure was due to the fiscal gains from petroleum taxes.
This scenario changed drastically in the middle of this year. An interest rate hike by the US Federal Reserve, an economic recovery in advanced countries, and the US re-imposing trade sanctions on Iran led to a spike in crude oil prices. This also triggered a fall in the rupee’s value vis-à-vis the dollar. Between January and October this year, the price of petrol increased 20% reaching an alltime high of Rs 84/litre in Delhi, triggering speculation of it even reaching triple figures.
Politically, the timing could not have been worse for the Bharatiya Janata Party (BJP), as the spike came just before the crucial election cycle in the Hindi belt states. Under pressure to reduce petroleum prices, the Union government announced a cut in excise duties on petrol and diesel. This triggered speculation of a slippage on the fiscal front, and had crude prices continued to rise, that would have been a certainty. However, a moderation in oil prices diffused a major crisis. India’s COB price fell from $80/barrel in October 2018 to $65/barrel in November 2018. Petrol prices in Delhi on 24 December were the lowest this year at Rs 69.86.
To be sure, the rupee-dollar exchange rate is still worse than what it was in the beginning of the year. However, given the low oil prices, its favourable impact (in terms of making exports competitive) will probably outweigh the inflationary effects (via petroleum imports) for now.