India braces for difficult times ahead as crude nears $130 a barrel

The biggest challenge for Indian authorities is to contain the adverse economic impact of rising crude oil prices, both at macro and micro level.

New Delhi:Indian authorities are expected to bring back four-hundred more stranded Indian students on Tuesday from the war-torn region as they race against the time to rescue all the Indian students stuck in Ukraine. However, this is not the only problem on the agenda of Indian authorities as they grapple to tackle bigger and more complex problems caused by the Russia-Ukraine war that will severely impact both the public finances and common man in the country.

The biggest challenge for Indian authorities is to contain the adverse economic impact of rising crude oil prices, both at macro and micro level. India’s oil and gas minister Hardeep Singh Puri Tuesday said that any decision to hike the retail prices of petrol and diesel would be taken by the oil marketing companies. India’s retail petroleum products market is dominated by state owned oil retailers such as Indian Oil, BPCL and HPCL. Technically, the retail price of petrol and diesel are not regulated in the country but the government exerts the influence over the decision making process of oil PSUs as they are under the administrative control of the oil and natural gas ministry.

Petrol, Diesel prices expected to rise

With the voting for five state elections getting over on Monday, including in India’s most populous state Uttar Pradesh, it is widely speculated that the state owned oil companies would revise the price any day as the crude oil neared $130 a barrel in the international market.

India’s budget for the next financial year beginning from the next month was based on the assumption that the international crude oil prices would be in the range of $75-80 a barrel for the FY 2022-23 (April-March 2023 period). However, within days of the start of the war, the price of the Brent Crude which determines the price of crude oil imported by India, touched $100 a barrel and on Tuesday it went past $127 a barrel as the fear of formal US sanctions on Russian oil companies weighed on the traders’ mind.

Sanctions to impact global crude prices

The situation may aggravate further as Russian authorities Tuesday warned that the price of crude oil in the international market would rise to $300 a barrel if the rich western countries ban Russian energy supplies as Russia would also resort to counter measures that may include restricting the supply to global markets.

It may be a nightmarish situation for Indian authorities and ordinary Indian consumers as rising crude oil prices will not only put extreme pressure on macro-economic situation such as increased inflation and a widening current account deficit that in turn will put pressure on the value of Indian Rupee against major foreign currencies such as US Dollar, Pound Sterling and Euro. It will also unsettle the budget of ordinary Indian consumers as any increase in petrol and diesel prices will have a cascading impact on almost everything, including freight rates and commodity prices.

In November last year, the Union and state governments had reduced the duties and taxes levied by them on petrol and diesel after public backlash as the price of petrol and diesel was an all time high.