In an indication of the Indian economy’s revival, the country’s petrol and diesel consumption is expected to grow by 14% and 10% respectively in FY22, according to rating agency ICRA. This assumes importance given that energy consumption, especially electricity and refinery products, is usually linked to overall demand in the economy.
“Benefitting from the anticipated rise in mobility and economic recovery aided by an acceleration of the coverage of covid-19 vaccines, ICRA has forecasted the YoY growth in the consumption of MS and HSD in FY2022 at 14% and 10%, respectively, on the low base of FY2021. Our forecasts suggest that consumption in FY2022, relative to the pre-covid level of FY2020, will be 6.7% higher for MS, and 3.3% lower for HSD,” Aditi Nayar, chief economist, ICRA Ltd said in a statement.
This comes in the backdrop of India, the world’s third-largest oil importer, witnessing an upward trajectory of transportation fuel prices. Diesel and petrol prices have already breached the ₹100 mark in several parts of India.
“Benefitting from the revival in consumption of fuels, the aggregate revenue generated from the cesses imposed by the Government of India (GoI) on MS and HSD is estimated to expand by 13% or ₹0.4 trillion to ₹3.6 trillion in FY2022. If this additional revenue of ₹0.4 trillion is foregone, it can support a reduction in cesses by ₹4.5/litre each on MS and HSD,” the statement said.
Any increase in global prices can affect its import bill, stoke inflation and widen trade deficit. Following the covid outbreak, crude prices for Indian basket of crude had plunged to $19.90 in April last year during the first wave before recovering to $66.95 a barrel in May, data from the Petroleum Planning and Analysis Cell showed.
“Such a revenue neutral cut in cesses on fuels would shave off a modest 10 bps from ICRA’s forecast of 5.25% for the CPI inflation for July 2021, in terms of the first-round impact, with a similar second round impact likely with a moderate lag,” the statement added.
Global crude oil prices are expected to be in the $75-80 per barrel range till September, Care Ratings said in a report on Thursday. The Indian economy contracted by 7.3% in FY21 due to the first wave of the covid-19 pandemic. With many states easing the lockdowns imposed during the second wave of the pandemic, India’ growth projections have been subdued and below 10% for the current financial year.
“The favourable prospects of a global economic rebound brought by the vaccine rollout optimism, have resulted in a nearly uninterrupted increase in the international crude oil prices since January 2021. Reflecting this, a weaker INR, higher cesses imposed by the GoI since March 2020 and the increase in Value Added Tax (VAT) rates by more than three-fourths of the state governments in 2020, have seen the average retail selling prices (RSP) of MS and HSD in the four metro cities increase to record-high levels of ₹99.54/litre and ₹92.03/litre, respectively, as on June 25, 2021,” the ICRA statement added.
Generation of electronic permits for goods movement, or e-way bills, picked up further momentum in the third week of June, indicating that economic activity was on the rise in line with the lifting of regional restrictions on mobility. Also, Indian power firms and ports will be better able to weather the impact of the second wave as compared to airports and toll roads, Moody’s Investors Service said in a report on Wednesday.
“Given the current scenario where domestic sentiment demand has been signed by the impact of the second wave of covid-19, the all-time high retail prices of fuels are both weighing upon disposable incomes and consumption, and feeding into inflationary pressures,” the ICRA statement said.