- Undoubtedly, the majority of the Indian citizens by now will be bracing up to accept the inevitable fuel price hike in the coming days. As you are aware, the assembly elections to five states are concluded and the oil companies are already pressing for the fuel hike as reported in the newspapers. The global economy is gradually recovering from the pandemic-induced devastation over the last few months to varying degrees. The Indian economy too is attempting to grapple out of the challenging situation by introducing several fiscal measures to tide over the crisis brought about by the pandemic.
PC: PTI
- When everyone finally heaved a sigh of relief vis-à-vis ebbing novel coronavirus cases, the Russian invasion of Ukraine has put paid to those hopes of revival big-time. The entire global community is anticipating stifling times ahead as the unwanted war declared by Russia on Ukraine shows no signs of abating. The biggest concern would be the spiraling price of crude which is bound to mount further pressure on the world economies. Note that on February 24, the Indian basket of crude breached a psychologically important price barrier of $100 a barrel. A mere ten days later, the price of the Indian basket crossed $126 per barrel just as polling for the five state assemblies ended.
- Mind you, this co-occurrence begs the question of pump prices of petrol and diesel, which since November have remained sticky despite the price trend in crude, will now see sharp increases to offset the higher costs being borne by oil refiners. Needless to mention, this should be avoided at any cost. The Government of India should also ensure that the increase in pump prices is gradual rather than a substantial increase to shock the consumers. You know, India’s economic context today is marked by a potential inflationary spiral along with weak aggregate demand. As such, this context rules out any meaningful role for monetary policy as nudging up interest rates now will harm the economic recovery.
PC: RUDRA SENSARMA
- Given the situation, it makes fiscal policy the best tool to manage the current economic situation. Since a sharp oil price increase at this stage will lead to a demand shock and undo some of last year’s economic recovery, the Union Government should absorb some of the uncovered costs of oil refiners for now. Thus, the Union Government must cut central fuel taxes as there’s definitely room for this as benefits from the moderation in global crude price between 2015 and 2021 were not passed on to Indian consumers. Mind you, a reduction in fuel tax revenue will be offset by a likely increase in tax collections too.
- Moreover, some of the key assumptions underpinning the Union Budget have become untenable on account of subsequent geopolitical turmoil, which is catalyzing inflation in other industrial inputs too. The situation leaves both the central and states with the responsibility of using fiscal policy to anchor economic recovery. Public investment and private consumption should complement each other to ensure the cushioning effect protects the citizen’s interest.
