ArrowArtboardCreated with Sketch.Title ChevronCrossEye IconIcon FacebookIcon LinkedinShapeCreated with Sketch.Icon Mail ContactPath LayerIcon MailMenu BurgerPositive ArrowIcon PrintIcon SearchSite TitleTitle ChevronIcon Twitter
Opinion

Modi must not reverse fuel market deregulation

Pressed to stem rising petrol and diesel prices, Indian leader can tweak taxes

Drivers in India are paying record-high prices at the pump, but the government should not sway away from fuel market deregulation.   © Other Provider(90days)

Petrol prices in Mumbai, India's financial capital and the costliest city in the country to fill up a car, have recently rocketed within sight of their historic high, around $1.24/liter.

Diesel, which is typically consumed in public transport, agriculture and industry, hit a new peak of $1.06/liter. The man on the street is not happy. But this is not a country likely to erupt in street protests or riots because of fuel price hikes -- the average driver will grumble, shell out more money at the pump and get on with life.

Vehicle sales prove the point. Car sales in India are expected to have jumped by around 8% in the fiscal year ended March 31, to around 3.28 million units. Sales of two-wheelers, the cheaper mode of personal transport, are projected to have shot up by 14% compared with 2016-2017 to 20 million units, a strong growth rate even for a country with a burgeoning population. India's gasoline demand surged by over 12% annually in 2017, according to government data, while diesel consumption rose by 10%.

The national media, however, have embarked on a frenzied coverage of the fuel price hikes, airing passionate debates with a potent mix of economics, market dynamics, popular sentiment and politics. The upcoming parliamentary elections -- due next year -- probably have a lot to do with it.

While the unfortunately high level of noise can be a distraction, it is certainly worth discussing the options facing Prime Minister Narendra Modi as he decides what to do when people, who were used to decades of protection with fuel subsidies and price caps, are exposed to the full shock of market forces. He should tweak fuel taxes, if he thinks he must, but he should not, on any account, return to the old system of fuel price controls and artificial caps.

It is a fact that drivers in India are paying record high prices at the pump when Brent crude is hovering at only three-year highs in the low-$70s/barrel, far from its historical peak of around $147/barrel in 2008.

This is mostly the result of the Modi government's bold fuel price reforms of recent years. Swept into power with a strong mandate in 2014, the prime minister wisely decided to seize on a sharp drop in international crude prices to fully deregulate diesel prices. Petrol prices had already been deregulated. The timing was opportune because a continuous slump in crude brought on by a global supply glut from the second half of 2014 more than offset the removal of government subsidies.

Not only were crude prices in a downward spiral, but given the shale boom in the U.S., the outlook was "lower for longer." That meant intrepid governments rolling back subsidies, a sensitive move politically as well as economically, would likely not have to worry about back-pedaling on their reforms.

India was not alone. China, Malaysia, Thailand, Vietnam and Indonesia were among the other major consumers in emerging Asia that variously resumed fuel price liberalization, which they had previously pursued in fits and starts, subject to the vagaries of crude price swings.

However, India stood out with the biggest strides, laying out a roadmap to full deregulation and being more decisive and transparent than its regional peers. In the interest of fully and promptly mirroring international oil price movements, the government in June 2017 introduced daily price revisions to replace the previous practice of fortnightly adjustments. That brought day-to-day pump price hikes into sharper relief and exposed consumers to the full volatility of the global market, compared with the smoothening effect of fortnightly revisions.

The Indian government did not stop there. Keen to partake of the low oil price bonanza, it jacked up taxes on petrol and diesel no less than nine times between November 2014 and January 2016. That was followed by only one reduction, in October 2017. As a result, taxes now account for nearly half the price of petrol in India, a highly contentious issue every time the debate over price increases is reignited.

Fully deregulating diesel in a single stroke instead of a gradual phase-out of subsidies and a rapid hike in fuel taxes were calculated risks taken by the Modi government that cannot be faulted, even in hindsight. Fuel subsidies have been a monkey on the back of governments across Asia through history.

Two other factors behind the latest surge in pump prices are outside the government's control. First, global crude prices have been strengthening on the back of tightening supplies and a rising geopolitical risk premium. Second, the Indian currency has been steadily weakening since the start of 2018. The rupee depreciated by nearly 8% against the U.S. dollar between January and April, raising the refiners' feedstock costs. India depends on imports to meet over 80% of its crude requirements, for which it pays in U.S. dollars.

As the next national parliamentary elections, in April or May 2019, draw near, the federal government can be expected to come under greater pressure to provide relief in case crude prices continue to climb.

Critics and political opponents will point to the tax component of the pump price as an obvious area for the government to yield some ground -- and make some cuts. That won't be an easy decision, as the government can hardly afford to lose tax fuel tax revenues while it ratchets up investment in building vital infrastructure such as roads, airports and railways, a key driver of economic growth.

However, tinkering with fuel price deregulation or bringing back some form of government price controls would be a far more regressive step. Providing some tax relief temporarily is surely the lesser of the two evils. Even if politically expedient, it will help preserve the integrity of pricing reforms, which should pay rich dividends in time to come.

Vandana Hari is founder of Vanda Insights, which tracks energy markets. She has two decades of experience providing essential intelligence on the energy commodities sector.

Get unique insights on Asia, the most dynamic market in the world.

Sponsored Content

About Sponsored Content This content was commissioned by Nikkei's Global Business Bureau.

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this monthThis is your last free article this month

Stay ahead with our exclusives on Asia;
the most dynamic market in the world.

Stay ahead with our exclusives on Asia

Get trusted insights from experts within Asia itself.

Get trusted insights from experts
within Asia itself.

Get Unlimited access

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this month

This is your last free article this month

Stay ahead with our exclusives on Asia; the most
dynamic market in the world
.

Get trusted insights from experts
within Asia itself.

Try 3 months for $9

Offer ends January 31st

Your trial period has expired

You need a subscription to...

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers and subscribe

Your full access to the Nikkei Asian Review has expired

You need a subscription to:

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers
NAR on print phone, device, and tablet media