The ₹3 per litre increase in prices of petrol and diesel announced by the Centre on Friday is neither here nor there. The move clearly reflects the predicament that the Centre finds itself in now. It has to be mindful of the inflation monster as fuel prices have a cascading effect across the economy. But leaving oil marketing companies, rich as they are, to shoulder the burden indefinitely is not an option either.
The increase is too small to meaningfully ease the burden on the oil marketing companies, which have been absorbing the crude oil price shock for two-and-a- half months now. Pricing economics would demand an increase of at least three to four times of what has been done now. But an increase in retail price of that proportion would be disastrous not just from the inflation viewpoint, but also politically for the ruling coalition. Even this small increase is projected to push up inflation by up to 25 basis points. Inflation in April was already at a 14-month high of 3.48 per cent and the May number will bear close watching. Policymakers are obviously wary of provoking the Reserve Bank of India (RBI) — a reversal of the interest rate cycle and increase in policy rates at this point in time would be extremely unwelcome from the government’s point of view. This probably explains the small increase now.
