Faced with a tough political call over high fuel prices, the Modi government is looking to stick it out, calculating the global rally in crude is likely to lose steam and this will ease the squeeze consumers are currently experiencing. Well-placed sources said while high fuel prices were problematic, the government may be reluctant to consider responses such as cuts in excise to reduce pump rates.
This would affect revenue collection and reduce availability of funds for welfare programmes, while also adversely impacting fiscal discipline that has kept inflation under check. The view in government is that the rally is unsustainable since it is not based on market fundamentals. Indeed, oil prices have slipped by $2 per barrel in the last two days after OPEC kingpin Saudi Arabia and its partner outside the grouping, Russia, hinted that they may agree to wind down the two-year production cut deal.
The political imperative for providing instant relief to consumers, too, is gone with the completion of the Karnataka polls. Elections in Rajasthan, MP and Chhattisgarh are in November, giving ample time for the government to wait for oil price correction.
“It is not a comfortable situation, but we will face it. Sometimes difficult decisions are called for and the overall interest of the economy and government finances have to be kept in mind,” said a top BJP leader. The opposition has attacked the government over the spike in fuel prices, saying the price of transportation has gone up.
BJP’s 2014 campaign jibes at Congress over high fuel prices are being recalled on social media and by opposition parties, putting the ruling party under an uncomfortable gaze. But going by the current thinking, the possibility of interventions to reduce rates are unlikely in the pipeline. The World Bank has projected a 20% jump in global prices of energy commodities — crude oil, gas and coal — this year, raising the prospect of cramping the government’s social spending ability as it prepares to head back to people for another mandate.
The concern could be a factor in not cutting back revenue further when it is looking to step up welfare spending ahead of elections. According to the World Bank’s April commodity markets outlook, oil prices will average $65 a barrel through 2018, 22% higher than the average price of $53 in 2017, due to the combined effect of production cut by Opec and Russia — the largest exporter outside the grouping of 14 oil exporting countries — and an uptickin demand. The outlook for consumers has worsened since the United States of America pullout from the Iran nuclear deal.
