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Abu Dhabi, UAEFriday 17 August 2018

Rising fuel costs are a jeopardy for Indian businesses 

Fuel prices have hit records in recent months, posing risks to economic growth in India

Activists of India's main opposition National Congress Party hold placard and shout slogan as they protest against the hike in fuel prices in Mumba. EPA/DIVYAKANT SOLANKI
Activists of India's main opposition National Congress Party hold placard and shout slogan as they protest against the hike in fuel prices in Mumba. EPA/DIVYAKANT SOLANKI

Zuzer Lucknowala is worried about the price of oil. His wedding and events company is feeling the heat from rising fuel costs in India, which has significantly pushed up the amount he has to spend to transport supplies to events he caters for, cutting right through his profit margin.

“Fuel price increases have forced us back to the drawing board,” says Mr Lucknowala, who is the chairman and managing director of Party Cruisers in Mumbai. “There’s a jeopardy in accepting and absorbing the cost upsurge.”

Mr Lucknowala is not alone in sounding caution: soaring fuel prices are a growing worry for many businesses in India, and pose a risk to growth in Asia’s third-biggest economy. Prices have hit multiple records in India in recent days, with petrol soaring above 85 rupees (Dh4.61) a litre in Mumbai on Friday.

Fuel rates have been driven by the steady rise in global crude prices. A weaker rupee and steep taxes on petrol and diesel in India have further compounded the issue. India is heavily dependent on oil imports. It’s the world’s third largest importer of the commodity and relies on imports for about 80 per cent of its oil needs.

“If oil prices [continue to] rise it’s negative for the Indian economy,” says Jigar Trivedi, an analyst at Anand Rathi Commodities. “Inflation will spike and the rupee will be very weak.”

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Dharmendra Pradhan, India’s minister of petroleum and natural gas, has said that the government is looking at solutions to address the situation. While the policymakers ponder on how to bring the fuel prices down, the opposition Congress party has grabbed the opportunity to criticise the government, saying the issue is detrimental to everyone be it a common man, a small firm or a big conglomerate. With general elections coming up next year in the country, this only adds to the pressure on New Delhi.

Oil prices have spiked after US President Donald Trump withdrew from an accord with Iran and announced re-imposition of sanctions. Opec supply cuts and declining production in Venezuela are among the other factors that have fuelled the increase in crude prices in global markets.

“The increase in international crude oil prices is terrible news for India,” says KR Pradeep, a chartered accountant who advises multinational companies from his base in Bangalore. “It worsens the trade deficit, current account deficit and balance of payments. It shrinks the fiscal manoeuvrability and has the potential of upsetting the ensuing parliamentary elections in India.”

Mr Pradhan earlier this month, spoke to Saudi Arabia’s Minister of Energy, Industry and Mineral Resources, Khalid Al Falih, over the phone, and “expressed his concern about rising prices and its negative impact on consumers and the Indian economy”, according to a statement by India’s ministry of petroleum and natural gas.

However, with Saudi Arabia aiming to keep oil at elevated levels, according to Bloomberg reports, it looks as though Indians, the likes of Raja Naidu, probably will not get a relief in the short term.

Mr Naidu, an Uber driver in Mumbai, is finding it difficult to make both ends meet and record high petrol prices are not helping.

“I was already struggling to pay off my car loan and petrol costs are adding to my problems now,” he says.

Analysts say the government is under pressure to keep the economy on a steady path if fuel prices remained on the up trajectory.

“The government’s efforts to ensure a well-oiled economy could be tested in its fifth year in office as multiple risks materialise, led by exogenous factors such as a runaway rise in global crude oil prices,” analysts at Crisil, a Standard & Poor’s unit in India, wrote in a report. “A rise in oil prices could stir the inflation scourge back to life.”

Crisil says it expects India’s gross domestic product to grow at 7.5 per cent in the current financial year. But the consensus, suggests that India would ideally need to achieve economic growth of 8 per cent and above to create more jobs for its population of 1.3 billion.

The Indian government may well end up having to intervene and reduce the duties on fuel, if oil prices remain high, Moody’s Investors Services says in a research note.

Taxes account for more than 20 per cent of fuel retail prices after they were raised in 2016 when oil prices dropped. State-owned companies could also be ordered by the government to absorb some of the costs, according to Moody’s.

“Because of the government’s widening fiscal deficit, Oil and Natural Gas Corporation and Oil India could be asked to bear part of the Indian government’s fuel subsidy, if prices stay above $60 per barrel for the fiscal year ending March 2019,” says Vikas Halan, a senior vice president at Moody’s.

The two companies have not contributed to fuel subsidies over the past three years, but in previous years they have absorbed more than 40 per cent of the country’s annual subsidy bill, according to the ratings agency.

It predicts that fuel subsidies in India could reach up to 530 billion rupees in the current financial year, the highest in four years, based on crude oil prices averaging between $60 and $80 per barrel.

“The government has budgeted for 250bn rupees of fuel subsidies in fiscal 2019, leaving a shortfall of [up to] 280bn rupees,” says Moody’s.

But if the government cuts taxes, this means less money in its coffers to spend on areas such as infrastructure, the development of which is vital to the country’s economy.

“Obviously it’s big challenge,” says Anita Gandhi, a director at Arihant Capital Markets, a financial services firm based in Mumbai.

“The last few years we had seen that lower oil prices had helped the Indian economy ... in terms of improving its fiscal deficit and current account deficit. Now we’re seeing a reversal of that.”

India last Monday received its first shipment of crude oil from the UAE, as part of its efforts to fill a strategic petroleum reserve in Mangalore in south India, which is aimed at helping to boost India’s energy security. The state-controlled Abu Dhabi National Oil Company will eventually store 5.86 million barrels of crude oil at India’s strategic petroleum reserve.

“The filling up began with the 2 million barrels reaching Mangalore,” according to India’s petroleum ministry statement. “Adnoc will bring additional crude oil and fill up the Mangalore cavern later this year.”

The ministry added that this is “the first time that a private foreign entity, is filling up an Indian strategic petroleum reserve cavern with crude oil”, which may also shield India from price volatility in oil markets.

Mr Pradhan this month visited the UAE, looking for further investments for India’s oil and gas sector.

However, at home, businessmen like Mr Lucknowala to cab drivers such as Mr Naidu, are counting the cost of the rise in fuel prices – their biggest fear is that they could rise even higher.

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