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India: Is the war in Ukraine behind fuel hike?

Murali Krishnan New Delhi
April 8, 2022

Prices at the pumps have been climbing sharply in India over the last two weeks as international crude oil rates rise. The ongoing crisis in Ukraine, with Russia heavily sanctioned, has caused logistical issues.

Gas deliveries in West Bengal, India
The Indian government says the hikes are much worse in other countriesImage: Subrata Goswami/DW

Fuel prices in India have gone up 14 times over the past two weeks, with the hikes occurring almost on a daily basis since March 23, after a four-month gap without a rise.

Currently, a liter (roughly a quart) of petrol in Delhi costs 105.41 Indian rupees (€1.28, $1.39). Diesel is selling at 96.67 rupees per liter.

In Mumbai, India's financial capital, petrol was selling at 120.51 rupees per liter and the price of diesel has been raised to 104.7 rupees a liter.

The retail price of fuel is made up of three different components: base price, which reflects the cost of international oil, a central excise duty and state taxes.

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Cost of food also on the rise

The steep increase in diesel and petrol prices has led to a cascading effect with a rise in the cost of living. Foodstuffs, such as vegetables, have also been affected as transportation prices have gone up significantly.

"Auto-rickshaw, cab and taxi drivers in Delhi will go on an indefinite strike next week if the government doesn't provide subsidy on the fuel or increase the fare," Ravi Rathore, a union leader, told DW.

Essential food items have increased, markedly affecting home budgets.

"Prices for almost everything have shot up. There has been a general spiral in the price of meat, especially chicken, eggs and milk," Sarasvati Sarkar, a resident of India's capital, told DW.

Industry watchers say Russia's invasion of Ukraine has had an effect. The conflict has impacted the price of Brent crude oil, so much so that it has risen from November's price of $81.05 per barrel to today's figure of $108.9. Some experts see these hikes continuing.

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Most crude oil comes from Middle East and US

"Though Russia is offering its Urals-grade oil to buy more shipments, it is just 1% of India's total imports. India imports 85% of its crude oil requirements, and the main crude oil suppliers are Iraq, Saudi Arabia and the US," economic analyst M K Venu told DW.

Domestic fuel rates are directly linked to international oil prices, but they have not been revised until now.

"Even if India continues to import crude from Russia at the existing rate, it will not make an impact. Even if it doubles or triples the amount, it won't make much of a difference," Venu said.

India and Russia recently floated a plan for New Delhi to pay for purchases of discounted oil with rupee-to-ruble transactions, as Russian banks have been cut off from dollar and euro payment systems.

Since the invasion began on February 24, India has purchased at least 13 million barrels of Russian oil and has contracted Russian crude oil for deliveries over the next three to four months.

"Further purchase of Russia crude oil will not have an impact on India's import bill. For the gas prices to come under control, the government can think to reduce some taxes or come up with some specific plans as it is very important to reduce the fuel prices, or else inflation will gallop," Ravi Datar, an energy consultant, told DW.

The ruling Bharatiya Janata Party (BJP) attributed rising fuel prices to the fallout from the Russia-Ukraine conflict, oil bonds issued by the then Congress-led United Progressive Alliance (UPA) government, and taxes by states. The UPA were in government from 2004 to 2014, when Narendra Modi's BJP assumed power.

"The rise of crude prices in the international market is the main reason. The government does not control fuel prices and therefore has no role in the increase," BJP spokesperson Samik Bhattacharya told DW.

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Inflationary trends

The government said the price increases have been minimal compared with the rise of petrol and diesel rates in other countries in the aftermath of the invasion. It also cited recent attacks on oil and gas infrastructure in Saudi Arabia as a reason for the spike.

Petroleum Minister Hardeep Singh Puri told Parliament this week that fuel prices had gone up by over 50% in countries such as the US, the UK, Canada, Germany and Sri Lanka.

"On February 24 when the military action took place, suddenly global oil prices shot up to $92, then up to $124 and went up to $130. Are we the only country affected by this?" said Puri, adding that the fuel price hike in India was actually one-tenth when compared to the rates in other countries.

It has taken up the issue of high crude prices with the Organization of Petroleum Exporting Countries (OPEC) and requested them to increase their production of crude oil. 

Economists believe that the oil shock will mean a prolonged inflation if the Reserve Bank of India (RBI) fails to take adequate measures to anchor inflationary expectations.

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The fluctuations in international oil prices and Indian fuel prices have never been one to one, as the formula to determine the fuel prices in India is inclusive of a benchmark rate based on international prices, domestic taxes and other components including freight.

"Global uncertainties emanating from the Western sanctions on Russia and supply chain disruptions of oil can exacerbate fuel price conundrum to long term," Lekha Chakraborty of the National Institute of Public Finance and Policy told DW.

"A conscious policy package is required to arrest the fuel inflation by government of India, as RBI won't be able to arrest fuel prices and the reputation of inflation targeting itself is at stake," she added.

Already the annual inflation rate in the country has accelerated for the fifth straight month to over 6% in February, the highest since June 2021, and above the market forecasts of 5.93%.

Edited by: John Silk

Murali Krishnan
Murali Krishnan Journalist based in New Delhi, focusing on Indian politics, society and business@mkrish11