THE tensions between Russia and the US-NATO in the past few weeks and the Russian military attack on Ukraine have sparked a big increase in international oil prices. The oil prices have surged and they stood over 100 dollars a barrel and gas prices have escalated by 62 per cent. This is going to have a direct impact on fuel prices and thereby inflation in India.

Episodes of high inflation in the recent past have eroded the purchasing power of the common people. The headline retail consumer price index or combined consumer price index (CPI-C) reached close to 7 per cent on an average during the period December 2019 to November 2020 and then moderated. This was once again followed by a spike of more than 6 per cent inflation during May to July 2021 and another spike in January 2022. According to RBI, the average inflation by consumer price index in the last quarter of 2021-22 will be 5.7 per cent and 4.5 per cent for the whole year of 2022-23. Consumer price rise was primarily driven by rising food prices which showed a sharp rise during the pandemic due to supply side disruptions, particularly reflected in high prices of edible oil, pulses, vegetables and protein rich food items. The other components that led to rising consumer price index was ‘fuel and light’ and ‘transport and communication’ within the miscellaneous group. Rise in crude oil prices was driving inflation in these components which heavily impacted consumer prices. With food inflation gradually cooling down due to easing out of the supply bottlenecks, consumer price index slightly moderated as the food component has the highest weightage in average consumption basket. But once again in January 2022 consumer price index has crossed 6 per cent.

It is also important to note that wholesale price index (WPI) which basically reflects inflation at production sites shows a steep rise to an average of 12.6 per cent during the period April 2021 to January 2022. This has been driven by low base as well as rises in prices of inputs particularly of minerals, crude oil and manufactured products. The weakening of the rupee also imported inflation and that also impacted production costs adversely. The big corporates with lots of reserves and savings could contain this rise in input costs for the time being while small and medium enterprises are facing a tight situation caught between rising production costs and sluggish demand. In fact many manufacturers have already indicated upward revision of prices in the near future.

Rise in crude oil prices has a direct bearing on consumer expenditure as transport costs as well as production costs will rise due to higher fuel price. The Economic Survey estimated that oil prices will be 70 to 75 US dollar per barrel throughout the year 2022-23. But that has turned out to be wishful thinking.

The retail price of petrol and diesel has been capped by the oil companies for the past two months as the central government did not want any increase in prices till the elections for assemblies in five states are over. Come March 10, when the results will be out, one can expect steep increases in the prices of petrol, diesel and gas. Such escalation of prices of petroleum products will lead to sharp inflationary surge.

In such a scenario instead of using this as an opportunity to realise higher revenue through indirect tax in the form of excise duty on increased oil prices, the central government should immediately cut down central excise duty so that the shock of higher oil prices added with excise duties once again does not hurt the average consumer and dampen the slowly recovering demand in the economy. In November 2021, the centre reduced excise duties by Rs 10 per litre of diesel and Rs 5 for a litre of petrol. After this cut, the total excise duty remained Rs 27.8 for a litre of petrol and Rs 21.8 for diesel.

In cutting central duties, priority should be given to do away with cesses and surcharges. These were perversely levied as the revenue from them need not be shared with the states. In the case of basic excise duties, revenue from them is shared with the states with the centre keeping 51 per cent and 49 per cent going to the states. At present, majority of excise duty levied on petrol (96 per cent) and diesel (94 per cent) is in the form of cesses and surcharge.

Inflation fuelled by sharp increase in fuel prices will hit ordinary people hard who are already suffering from job loss and falling incomes due to the economic downturn in the Covid period. The Modi government should not wait. It should immediately cut the cesses and surcharges on petrol and diesel to cushion the impact of the rise in international oil prices.

(March 2, 2022)