India: High oil prices likely to upset monthly budget

The rising oil prices are building up an underlying inflationary pressure. Though petroleum products’ prices are administered in India and there is an incomplete pass-through of the burden to the final consumers. Nearly a fifth of the incremental change in inflation was accounted for by fuel price index for the week ended March 3.

A strong demand growth and high profit margins have given India Inc the leeway to absorb a part of input cost hikes in the past. But, as corporate earnings have slowed and economic growth is likely to soften, companies are running out of headroom to absorb further increases in crude oil prices. Most manufacturers are expected to take a price hike and some have done so in last few month. More increases in crude prices or a hike in domestic fuel prices will build up more pressure.
Retail prices of petrol and diesel are unlikely to go up, considering the forthcoming general elections and higher food prices. The government may compensate oil-marketing companies by issuing more oil bonds and this will increase future subsidy burden. This will create more liabilities for the future government and raise fiscal deficit few years down the road. Oil bonds will only delay the pain and will come back to haunt tax-payers in future.

Another fallout of rising oil prices is the depreciation in rupee against dollar. A stronger rupee helps cool domestic inflation by lowering the price of imports, which include crude oil food and many industrial raw material.

Economic Times