By R Sasankan

India's retail inflation is running at over 6.2% per annum; breaching the RBI's tolerance band of 2%-6% and well above the RBI's target of 4% per annum. Retail price inflation touched a 14-month high of 6.21% in October 2024. The GDP growth rate fell to 5.4% in the July to September quarter of 2024. High inflation squeezed RBI's monetary policy space for boosting the slackening economic growth by lowering interest rates. Retail prices of petroleum products have contributed significantly to raising inflation and keeping it high.

The retail prices at the pump that the hapless Indian consumers pay for Petrol and diesel have remained the same since April 6, 2022. Based on official data, the average price of the Indian crude basket in April 2022 was $ 102.97/barrel. This average price of the Indian crude basket rose to $109.51/barrel in May 2022 and peaked in June 2022 at $116.01/barrel. Thereafter, the price of the Indian crude basket has steadily declined month after month and reached a low of $72.48/barrel on December 5, 2024. This is the result of the dampening market sentiment for growth in oil demand, especially in China.

The Indian crude basket on December 5, 2024 was about 30% below the level at which the petrol and diesel prices were fixed 32 months ago. For over 28 months, starting around mid-July 2022, global crude prices have been falling and the price of the Indian crude basket has been below the level at the time of the last revision in retail price of diesel and petrol 32 months ago. Despite the well documented impact of high transport fuel prices on retail inflation; no attempt has been made to align the retail prices of petrol and diesel with the lower and falling crude prices globally.

The Indian basket of Crude Oil represents a derived basket comprising Sour grade (Oman & Dubai average) and Sweet grade (Brent Dated) of Crude oil processed in Indian refineries in the ratio of 78.5:21.5. The above estimate of 30% reduction in the price of the Indian crude basket does not include the savings from the discounts received, relative to the Brent benchmark, on purchase of Russian crude oil that now accounts for some 40% of India's crude imports.

These savings amounted to some $ 10.5 Billion in the period April 2022-May 2024 alone when the share of Russian crude in India's crude imports averaged well below the current 40%. So, the savings in the input cost of Imported crude, that now accounts for over 87% of the crude processed by Indian refiners, exceed 30% relative to their level at the time of fixing the current retail price of refined products in April 2022. These savings have not been passed on to the consumers.

How much of these windfall gains have been mopped up by the Government of India is not in the public domain. The Government on December 5 waived the windfall profit tax on domestic crude producers and refiners. Nevertheless, retail prices continue to remain at the levels set in April 2022 when the Indian crude basket was about 30% higher. Could it be that these reports announcing waiver of taxes on windfall profits are misleading?

In any event, it is clear that the Government could have eased inflationary pressures by following the Government's stated policy of allowing retail prices of petroleum products to be market driven. Clearly, this good economic policy initiative is not being followed in practice, despite the positive impact it would have had on lowering inflation and thereby boosting real GDP growth.

What is unpardonable is that the above violation of the stated policy was allowed when the global outlook of oil prices remains extremely soft. OPEC Plus, that had earlier planned to start reversing the self-imposed production cuts starting December 2024, has recently announced that it will now commence this exercise only in April 2025. Further, the restoration of full production has now been postponed to end of 2026. So, production cuts will remain in place for at least 2 more years. This underscores the soft market outlook in the short to medium term, despite the continuing geopolitical tensions in Ukraine and the Middle East.

Clearly, India's Ministry of Petroleum & Natural Gas is ignoring market reality and the pain of the consumer at the petrol pump. Someone in the Government needs to correct this anomaly because it is detrimental to the common man and to the Nation.