A worry for every household is inflation. There is news of prices of several goods and services increasing ever since the war started. Even if one may not be directly consuming the product or service, there will be indirect effects, as there is a value chain involved. Besides, all markets are interconnected. After coming out from a year of benign prices, we could be moving into one where the supply shock of higher crude oil prices and supplies of petro products can upset consumer budgets. How has this played out so far?
When the war started, it was largely expected that it would end soon. However, it has not, and there is no clarity on how it would proceed. Meanwhile, there has been an impact on supplies and prices. The supply of gas and oil has been hampered due to the closure of the Strait of Hormuz. While the government has worked hard to ensure that supplies continue while also exploring alternative sources, higher prices are inescapable. Russia has been supplying us with oil. However, the discounts have dried up, as all countries are trying to source the same from Russia. Further, with shipping costs increasing as the price of crude oil remains high, there is a premium to be paid. Lastly, the cost of insurance has increased due to the war. All this has kept prices high even while physical supplies are being managed. In fact, the production of gas was increased by domestic companies once the war began and supplies slowed down from global markets.
The government initially increased the price of LPG for domestic consumers (Rs 60) and commercial users (Rs 993). The latter faced challenges in supplies, which led to higher prices being charged by restaurants in particular. Industries like paints, glass, and ceramics have come under pressure due to these higher costs, while they try to ensure that production continues. But this pushes up the price of houses or any renovation work. Alongside, higher prices of crude oil have fed directly to the cost of aviation turbine fuel, which has led all airlines to increase their charges. The price of ATF is market-driven, which means that the passenger has to bear the cost finally. The number of flights has been cut down simultaneously. While air travel may be considered elitist, cargo charges have gone up, which will feed into the costs of all goods transported by air.
While the government initially protected the consumer by cutting the excise duty on petrol and diesel (Rs 10 a litre), a call was taken to increase the same in 4 tranches to a cumulative Rs 7.50 a litre. There could be more hikes in the future, and it is believed that it could go to Rs 10 finally. Even then, the OMCs will not be fully recovering their costs, especially if the price of crude remains in the range of $100-110/barrel. This has increased the price of running one’s own vehicle. But the diesel price hike is more significant, as it has fed into all transport costs. This ranges from food grains (tractors are used for the transport of grains to mandis), edible oils, coal, steel, cement, etc., to even taxis and autos which use diesel, especially in rural areas. Truck associations have announced increases varying from 3-5%, depending on the distances. It is not far off when even taxi and auto fares will be raised, as CNG prices too have been raised. Therefore, the daily commute is all set to rise.
Quite independently, milk producers have increased the price by Rs 2 a litre while the price of bread has gone up by Rs 5 a loaf. The argument here is that the cost of production is up, with the prices of wheat, milk, and sugar going up. Further, a number of FMCG companies have announced that price increases are on the cards for products like toothpaste, soap, biscuits, detergents, etc. Durable goods manufacturers have other issues with costs, with electronic components being in short supply with several diversions in the global market. Air conditioners, refrigerators, and washing machines have witnessed an uptick in prices, which could be Rs 500 to Rs 2000 depending on the size and capacity of the appliances. Automobile companies have also raised their prices by Rs 10,000 to 30,000 due to higher prices of steel and other raw materials.
To top it all, the IMD has indicated that the monsoon will be subnormal with a very high possibility of an El Nino. Extreme heat conditions, which are being witnessed like never before in all parts of the country, presage tougher times with the monsoon being shaky in some areas. This can also mean possible shocks in agricultural production, especially in pulses and oilseeds. In fact, edible oil prices have started increasing already, as the world over there is a move to convert oilseeds, sugarcane, and maize into ethanol for blending with fuel. As India imports over 60% of edible oil, the imported cost is bound to increase. Add to this the rupee depreciation of 3-4% already witnessed this financial year, and there is a very good chance of this also being transmitted to the cost of production of all industries which use imported products as inputs.
The problem, really, is that as and when the war ends and crude oil prices return to the range of around $80/barrel, which has been the long-term normal level, will there be a rollback of prices in India? Probably not for most products, which tend to be sticky in a downward direction. It was seen that when the crude touched a low of $60/barrel before the war, retail prices remained where they were. It is unlikely that in the future the stance will really change.