India is navigating a complex "catch-22" situation concerning petrol and diesel prices, according to Harsh Gupta Madhusudan, an author, fund manager, and Chief India Strategist at Ionic Wealth. While an ideal solution might seem straightforward, the reality of India's "political economy" necessitates a more nuanced approach to fuel pricing.
Speaking to Business Today TV, Gupta Madhusudan elaborated on the government's strategy amidst rising global crude oil prices and a depreciating rupee. He noted that while countries like the US or Europe typically see daily fluctuations in pump prices determined by private players and taxes, India's unique socio-economic context, as a "per capita poor country" with a history of price controls, demands a different method.
Historical Context and Current Pressures
For several years, excluding the period during the Ukraine war, oil prices remained relatively stable. This allowed the Indian government to utilize fuel taxes as a revenue-generating mechanism, simultaneously incentivizing a shift towards hybrid and electric vehicles. Gupta Madhusudan described this as a "Pigouvian environmental tax" that also served fiscal purposes.
However, the current global landscape presents new challenges. With Brent crude oil now hovering in the $90-100 range and the Indian rupee experiencing depreciation, maintaining stagnant fuel prices is no longer sustainable. Gupta Madhusudan highlighted that after recent election results, price adjustments became "inevitable," especially with upcoming elections in February, making long-term subsidies impractical.
A "Reasonable Strategy" for Gradual Adjustment
The government's current strategy involves increasing petrol and diesel prices on a daily or weekly basis. This approach aims to avoid a sudden, "headline kind of shocker" for consumers while still allowing the necessary price signals to filter through the economy cumulatively. Prior to the elections, the government had temporarily cut taxes by ₹10 to absorb some of the shock on Oil Marketing Companies (OMCs), but this measure could not be sustained indefinitely.
Gupta Madhusudan concluded that while this might not be the "first best solution," it represents a "reasonable strategy" given the political realities and economic pressures India faces. It reflects an attempt to balance fiscal needs, global market dynamics, and public sentiment without resorting to abrupt, large-scale price adjustments.