A perfect storm is heading our way, Swaminathan Aiyar warns, Click to Know

The Indian middle class will have to brace themselves for a dent in their pockets as a result of the global fuel price increase, which will be exacerbated by an expected surge in edible oil prices.

“These are extremely trying times. The central or state governments are powerless to resolve this. This is a typhoon approaching from the outside. Second, it is not limited to oil. For example, the United States has a record inflation rate of 8.5 percent, but when food and fuel are excluded, the overall inflation rate is 6.5 percent “2%,” Swaminathan Aiyar told ET Now.

Prime Minister Narendra Modi named states yesterday that have not reduced value added tax or VAT on petrol and diesel despite the Union Government lowering excise duties, prompting swift responses from other political parties.

He asserts that consumers will have to bear higher prices even if the federal government and states stop blaming one another and agree to share the tax burden. “I would argue that current prices are far from the peak. Global oil prices are currently around $105 per barrel. If the Ukraine conflict continues, I envision oil prices rising to $110, $115, $120, or $130. Thus, while there is a current issue, it will soon be supplanted by even worse issues. Therefore, how do you divide the burden between the Centre and the states at the moment? More will have to be borne over the next six to seven months, assuming the war and sanctions continue,” Aiyar explained.

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The oil ministry’s proposal to reduce the duty on gasoline and diesel reportedly did not win approval from the finance ministry.

Central excise duty and state-imposed value-added tax account for a sizable portion of the retail price. In Delhi, taxes account for 42% of the retail price of petrol and 37% of the retail price of diesel.

Excise duty on petrol has increased significantly over the last eight years, from Rs 9.48 per litre in April 2014 to Rs 27.9. Diesel duty has increased from Rs 3.18 to Rs 21.8 per litre. The central excise revenue from petrol and diesel increased from Rs 1.78 lakh crore in fiscal year 2020 to Rs 3.72 lakh crore in fiscal year 21.

Oil prices began falling in mid-2014 and have remained low for the majority of the last eight years. The Centre increased tariffs to recoup gains from the decline in prices. Recent price increases, combined with high taxes, are beginning to bite consumers and harm the economy.

To alleviate the plight of the middle-class consumer, the Union and State governments must stop blaming one another, according to Aiyar.

“All I can say is that in politics, each side enjoys laying blame on the other. At this point, both sides should take action rather than simply pointing fingers at one another. The Centre must reduce duties modestly and not excessively. State governments must follow suit, and at the end of the day, we will have to live with higher prices. Let us not pretend that something is entirely the fault of Mr Modi or the states,” Aiyar stated.

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According to a Business Standard analysis, it is indeed a non-BJP state, Maharashtra, that earns the most money from the sale of petroleum products in absolute terms. However, Uttar Pradesh, which is BJP-ruled, has the second highest collection.

Swaminathan Aiyar Warm
Swaminathan Aiyar Warns

Industry watchers predict that the world’s largest palm oil producer’s decision to halt exports on Thursday will increase prices for all major edible oils, including palm oil, soy oil, sunflower oil, and rapeseed oil. This will exacerbate the strain on cost-conscious consumers in Asia and Africa, who are already feeling the pinch from rising fuel and food prices.

“Indonesia’s decision has a global impact on vegetable oils, not just palm oil,” James Fry, chairman of commodities consultancy LMC International, told Reuters.

According to Aiyar, even when food and fuel inflation are excluded, the balance is so high that it is critical for countries to significantly raise interest rates over the next 12 months. “The question is whether the Reserve Bank should follow suit or whether, in the Indian context, we can afford to prioritize growth over prices. The reality is that we will never be able to control prices on our own.”

“I believe the RBI is correct in asserting that excessively high interest rates will stifle production without resolving the problem of imported inflation.”

Aiyar anticipates the Centre will maintain the free food program and pursue some oil and excise duty reductions for cushion. “I fear that this inflation will persist for a long period of time, even if Covid does not reappear and even if the Ukraine war is brought to a reasonable conclusion. I do not believe we will ever be inflation-free.”

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