India staring at new inflationary challenges as oil prices rise and demand returns

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The recent increase in global crude oil prices is creating immediate short- and mid-term challenges for India as it emerges from a second wave of the Covid-19 virus to find pump prices at record highs that could impact both inflationary pressures and the economy.

Global crude prices were touching $75/barrel this week – up 33% from a year ago — driven up by rising demand from large economies, falling inventories and a cautious increase in production by OPEC+ countries.

Demand in India for diesel was up 12 percent month-on-month in the first half of this month, while that for petrol rose 13 percent in the same period, government data showed.

Costlier crude – and India imports most of its requirement – has seen pump prices of both diesel and petrol top Rs 100/litre in some cities thanks to high taxes on the products, raising worries that this trend would impact economic recovery at a time when cities and businesses are beginning to reopen after being shut due to the second wave of the pandemic that killed thousands of people.

The consumer prices index rose by 6.3 percent and the wholesale price index was up almost 13 percent in May, as rising fuel prices started hitting in. This could further impact buying power of consumers, affecting overall demand and economic growth that has slowed down in the past two months.

The bigger worry, however, is the rising import cost of crude oil that could widen the current account deficit as the economy recovers from last year’s negative growth.

India’s crude import bill was $101 billion in the 2019-20 (April-March) fiscal, but fell sharply to $63 billion in the 2020-21 fiscal as the country shut down last year to mitigate any damage from the pandemic.

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