Region: Fuel price impact

Fuel price hike will push inflation higher

Angry Consumers in India Protest Fuel Prices

On June 4, the Indian central government announced a price hike of Rs 6 per litre of petrol, Rs 3 on diesel and Rs 50 per LPG cylinder, together with customs and excise duty cuts in an attempt to save the oil marketing companies from bankruptcy.

Angry consumers blocked rail tracks and roads and shut down businesses in parts of India for a second day Friday to protest a hike in fuel prices by the government, while Malaysia defended its decision to end fuel subsidies.

Oil marketing companies buy crude oil from the international markets and distribute it in India. India imports 73 percent of its petroleum needs as the production of crude oil here is very little. The price of crude oil in the international markets has nearly doubled from a low of $60 per barrel in May 2007 to $130 a barrel in May 2008. The retail price of crude in India, administered by the government, has not been raised since 2004. Hence, these oil marketing companies have been running a very unprofitable business of buying crude at high prices and selling it to domestic consumers at low prices. To defuse this crisis, the government raised fuel prices by an average of 13 percent with full knowledge of its impact on inflation. Impact on inflation : The current annual wholesale inflation is already high at 8.1 percent. The government expects the effect of price hike on inflation to be marginal at around 60 basis points. Economists are of the opinion that inflation will flare up to a 13-year high of 9.2 percent due to the price increase. A rate of nine percent would be the highest inflation since 1995. A high inflation rate affects the consumer at the retail level and the corporate profits too. The cost of living rises and the consumer has to pay more for the same goods and services. At the corporate level, the higher cost directly impacts the bottom line. Their inability to pass on the price increases to the consumer further squeezes their margins.