High fuel prices forcing people to cut expenditure on health, utilities: SBI report

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NEW DELHI: Fuel prices hitting record highs has been a cause for concern since the past few months, so much so that it is now eating into essential consumption expenditure of the common man, says a report by State Bank of India’s (SBI) economic research team.
The report notes that surge in prices of petrol and diesel is making people spend less on other non-discretionary items like grocery, health and utilities, thereby crowding out their demand.
Petrol has crossed the Rs-100-a-litre mark in more than one and a half dozen states and union territories (UTs), while diesel is being sold at over Rs 100 a litre in Rajasthan and Odisha.

As a result, expenditure on fuel consumption has jumped to 75 per cent in June from 62 per cent in March.
Impact on inflation
The report warned that spending more on fuel can have an adverse impact on inflation numbers.
Retail inflation based on consumer price index (CPI) for the month of June came in at 6.26 per cent, thereby breaching the upper end of Reserve Bank of India’s (RBI) comfort band for the second straight month.
CPI inflation moderated slightly in June from 6.3 per cent in May, while core inflation also eased marginally to 6.16 per cent from 6.4 per cent in May.

According to SBI’s calculations, with every 10 per cent increase in petrol prices (Mumbai), there is a 50 basis points (bps) rise in CPI.
Inflation impact on household savings
The report further notes that even though inflation has shown marginal decline, the levels are still elevated and led to a fall in financial savings, thereby adding to household challenges.

As per SBI estimates, during the second wave period (March-June), number of districts with deposit outflows almost doubled than the first wave.
The overall data of ASCB deposits indicates that during in Q1FY22 (till June 18), deposits declined by 38 per cent, compared to the growth seen during Q1FY21.
This clearly indicates rising level of household stress.

Demand for tax rationalisation
The rising impact of fuel rates has led to a demand for urgent cut in oil prices through tax rationalisation.
As per estimates, over Rs 40 per litre goes as taxes and excise to governments at the Centre and states.
If taxes are not rationalised then consumer’s non-discretionary spends will continue to get distorted and crowd out discretionary expenses, SBI said.
This will also impart an upward bias on inflation.
International oil prices
With international fuel prices rising by $6 per barrel between May and June, the report said that future outlook hinges on production increases by Opec+.
The rebound in international oil prices from lows hit in May on the back of demand recovery has sent petrol and diesel rates to a record high in India.

Besides, taxes were increased when the global crude prices had dropped but have not been rolled back even as crude prices have rebounded.
Production cuts by Opec and allies has further led to curbs in supply and rise in oil prices.
India which imports 85 per cent of its oil needs, has long pressed producers’ cartel to phase out its production cuts and allow oil prices to come to reasonable levels. But to no avail.
India and Opec
India is the world’s third-largest consumer of crude and Opec nations such as Saudi Arabia have traditionally been its principal oil source.
But Opec and Opec+ ignoring its call for easing of supply curbs, had led India to tap newer sources to diversify its crude oil imports.
As a result, Opec’s share in India’s oil imports dropped to about 60 per cent in May from 74 per cent in the previous month.
The two sides have somewhat patched up relations, with Saudi Arabia and the UAE supplying critical medicine, oxygen and equipment to help India battle its second wave of coronavirus infections.
(With inputs from agencies)

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