Economist Dr. Rathin Roy warns that India must prepare for a prolonged period of elevated oil prices, as even if the West Asia conflict ends within 15 days to a month, oil supply disruptions will take 7-8 months to resolve due to inventory replenishment and infrastructure refurbishment needs. When crude prices exceed $120 per barrel, India faces significant macroeconomic challenges including increased fiscal deficit and current account deficit. The government has a buffer mechanism of lowering excise taxes on oil and diesel to temporarily protect citizens, but this will require higher fiscal deficits or cuts to subsidies. Roy recommends that the government should pass wholesale oil prices to consumers while using targeted subsidies through the DBT mechanism to protect vulnerable populations, rather than allowing oil marketing companies to sustain losses.
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India Fuel Price | 'India Must Prepare For Long Phase Of High Oil Prices': Economist Rathin RoyAdded:
Dr. Datin Roy, your initial thoughts on the manner in which the fuel price hikes have been passed on to the consumers, the extent to which this can go on, and the uncertainty about when the war ends, if it ends, and what happens to fuel prices once it ends, and how long they stay high before they start coming low. All those massive uncertainties in which these decisions are being taken. Well, unlike many people in India, I hate talking in the future tense.
So, we can talk about that later, but let me stick to the present tense for a minute. I'm on the present tense.
Uh at present, there are we know two things. One, that the price of oil is going up.
We also know that the impact of that, not just on consumers' pockets, but also on the balance of payments of the current account deficit, is likely to be high and accelerating the higher the price of oil goes. That is, if it goes from more than $100 a barrel internationally up to 120, we will then start have to having to worry about the macroeconomy. We're not there yet. Uh and we also know, as Sujit said, that the government has a buffer. The government has the the government has a buffer which doesn't protect India, but can protect citizens temporarily from the full impact of the oil price hike, which is to lower excises on oil and diesel. Now, that will then impact on the government budget. We will have to then make do with a higher fiscal deficit, or the government will have to cut some of its, you know, subsidies and compensatory expenditures that it has gotten the habit of giving. So, these are difficult decisions going forward, but what I'm not doubting is that we should prepare for the long haul in terms of elevated oil prices. That's the intelligence I'm getting in London as well. No one is saying that even if the war stopped in in 15 days or a month, the unraveling of oil supplies will take anything less than 7 to 8 months.
Because inventories have to be replenished, uh infrastructure has broken down that will have to be refurbished, countries that are more powerful than us and richer than us will stockpile faster than we are able to.
So, for all these reasons we have to prepare for elevated oil prices. Now, the question is how much elevation can be passed on to the consumer. And here the government has one bad option, which is what the old government did, the Congress, and I don't recommend that, which is to let the oil marketing companies make losses and worry about it tomorrow. No, don't do that. It's okay and now it's a cash flow issue if temporarily there are under-recoveries. But within a fiscal year, I think government has to make up for that. The government can make up for that essentially by passing on oil the the the wholesale oil price to everybody, including on fertilizers, and then can take compensatory action by imposing subsidies, by by giving out subsidies, as it has done very effectively through the DBT mechanism, to particular groups of the population that it feels will be disproportionately hurt, which are unfortunately not the viewers of NDTV.
I mean, a completely different class of people, people who are less fortunate than those who watch NDTV, people who have to make do with much less on a daily basis, people who worry about the impact of fertilizer on food prices. All these things can be contemplated as in terms of a larger strategy. So, to conclude, the consu- some consumers can be protected. There will be cost because this is a price shock.
This price shock is not going away in the short run, and therefore the government has to plan whether it takes this price shock on budget and to what extent, and to what extent it is able to pass on the cost to the consumer while protecting vulnerable groups. If
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