While some countries are yet to pass on higher prices of energy products and other commodities to households and businesses, it is “inevitable” they will have to do so, the Ministry of Finance said on Wednesday, adding that the need to build buffers for key commodities has “moved up the ladder of policy priorities” in light of the West Asia conflict.
“Some countries have begun to allow prices to be passed on to end-users – households and businesses. Some are yet to do so. But it is inevitable,” the finance ministry said in its Monthly Economic Review report for April. “During a period of supply disruption, demand has to moderate; failing that, countries will have to pay a much higher price for energy supplies.”
The war in West Asia has led to a sharp increase in prices of key energy items, with the closure of the Strait of Hormuz disrupting the supply of commodities that serve as inputs for industry. So far in April, the price of India’s crude oil basket has averaged $114.3 per barrel, slightly higher than March’s $113.49/bbl, according to data from the petroleum ministry. However, before the war began, the average price in February was $69.01/bbl.
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The finance ministry’s comments come amid speculation the pump price of petrol and diesel will be raised following the assembly elections. This has led to instances of panic buying in some parts of the country. However, the government has dismissed such talk, saying there is no such proposal.
The government has shielded consumers from the higher global fuel prices caused by the West Asia war, with the pump price of petrol and diesel remaining unchanged. However, the higher global oil prices mean public sector oil marketing companies (OMCs) are incurring losses of around Rs 20 per litre on petrol sales and Rs 100 per litre on diesel sales.
On April 23, the Ministry of Petroleum and Natural Gas had said in a post on social media platform X that “India is the only country where petrol and diesel prices haven’t increased in the last 4 years”.
Build buffers, unleash policies
Writing in its monthly report, the finance ministry also said an “enduring message” for policymakers from the West Asia conflict is that not only do buffers have to be built for energy and other key commodities, but this need has “moved up the ladder of policy priorities and will remain there for the next decade or two as geopolitical conflicts intensify”.
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Arguing that the current crisis should not be wasted, the report said India should prioritise energy security and resilience, but not substitute “one import dependency for another”.
The Strait of Hormuz accounts for a fifth of the global flow of oil and liquefied natural gas (LNG), with around 40% of India’s total oil imports moving via the key waterway before the war. India imports nearly 90% of its crude oil requirements.
Don’t ‘assume the best’
With the war entering its third month and a resolution no closer, the finance ministry said there is “more haze than visibility” on how long energy supplies will remain disrupted, with the US Energy Information Administration’s Short-Term Energy Outlook not looking “pretty”. Given the uncertainty, “it does not make sense to assume the best, as stock market investors seem to be doing,” the report said, going on to add that many international agencies “appear ‘guilty’ of assuming a swift restoration of normalcy to energy supplies”.
Commenting on the Indian economy, the report said risks are tilted to the upside for inflation as well as fiscal and external deficits, but to the downside for growth. “However, while striving to sustain economic growth, policy is expected to safeguard medium-term fiscal and external stability,” it said.
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While India’s headline retail inflation rate only rose slightly in March to 3.4% from 3.21% in February, wholesale inflation jumped to a 38-month high of 3.88%. This, the finance ministry said, indicated emerging cost‑push pressures that could transmit to consumer inflation if supply disruptions persist. And while high-frequency data suggested some supply-side moderation, “demand-side indicators remain reasonably resilient”.
According to the ministry, the “current crisis demands that all stakeholders come together” and get matters such as public transportation “right holistically” to not only improve energy security but liveability of Indian cities as well. Further, the domestic decriminalisation and deregulation agenda “need not be hostage to external developments” and simpler regulations that reduce the cost of imports and exports “will be particularly valuable” at the moment.
On the agriculture front, it said “this is the ideal time to unleash long-overdue policies” or eliminate some of them to remove “distorted crop choices” and improve productivity. The forecast by the India Meteorological Department of a below-normal and uneven monsoon underscores the urgency of getting agricultural and water policies right. “If not now, when?” the report asked.
