India in a bind as crude prices hit a new high

NEW DELHI: India as a net importer of crude oil and gas is in a tight spot as the Brent crude oil price surged close to $100 per barrel on Tuesday, the highest since September 2014, due to the fears of supply disruptions due to rising tensions and border clashes on Russia-Ukraine border.

The government is also aware of the impact of Russia-Ukraine border tensions as finance minister Nirmala Sitharaman said yesterday the crude oil was a worrisome situation and the government was keeping a watch on the movement of Brent crude prices which primarily determines the price of the Indian basket of crude oil.

Addressing the press in Mumbai on Tuesday, Sitharaman said India wanted a diplomatic solution for the situation.

The price of Brent crude oil has gone up by nearly 40% in the last three months as it was trading around $70 a barrel at the start of December last year.

India a net importer of crude oil, gas

India imports nearly 80% of crude and oil gas requirements from abroad and any supply disruptions due to the Russia-Ukraine crisis will have serious repercussions as not only the domestic prices of petrol and diesel will be under pressure but India’s imports will also rise considerably, putting pressure on inflation and current account.

Petrol, diesel prices are already at a high as petrol is close to Rs 100 a liter in national capital Delhi and diesel is close to Rs 90 a liter. Though the petrol and diesel prices have come down from the record highs after the government cut down the excise duty on petrol by Rs 5 per liter and Rs 10 per liter in November last year due to public pressure.

The excise duty cut by the Centre was followed by the cut in value-added tax (VAT) or sales tax imposed by states which gave some relief to the consumers but with the Brent prices nearing $100 a barrel, there is a distinct possibility that the petrol and diesel prices may be revised upwards after the polling gets over in five states early next month.

Inflationary pressure

Any increase in petrol and diesel prices, particularly in the prices of diesel which is the main transportation fuel, has a cascading effect on the prices of other commodities that will put pressure on inflation. According to Industry estimates, a 10% hike in the crude oil price leads to a nearly 1% rise in India’s wholesale price index (WPI) which is hovering in double digits for the last 11 months.