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The Great Indian Economy: Ravaged by COVID-19, Ruined by Petroleum Prices and Policies:


The economy has suffered immensely due to the price rise in essential oil and fuel. The economic slowdown put the economy under downward pressure leading to cutting down on the consumption of essential commodities. The policy needs to be more resilient to curb the ravages of unprecedented events. Let us see how the fluctuating petroleum prices are impacting the economy.

The frequent rise in oil and gas prices has always been a concerning issue. No two years have ever seen the same oil prices. This makes the price rise a phenomenon that needs to be handled with absolute diligence by all countries that import and export oil. The year 1991 was a remarkable year in the history of India when the country adopted the principles of ‘Liberalization, Privatization, and Globalization’. This enlarged the supply chain of petroleum oil to the private players in the economy as well. In 1993, for instance, kerosene which was previously distributed through the Public Distribution System (PDS) had seen a major change in ownership. Private parties now imported kerosene and sold it in the domestic market. The initiation of globalization steadily boosted networking and improved cooperation among countries, widening the market base. The price variation that happens in the oil business is a key element in the economic front. Price variations were solely viewed as an economic transaction impact because the processes involved in bringing the fuel and oil into the country are rigorous.

Impact of price rise in petrol, diesel, and LPG

The impact created by the rising prices of petrol, diesel, and LPG can be analysed in two different ways. The direct impact of the price rise is the inflation that has erupted in the economy. Inflation in any economy is the resultant of a persistent rise in the general price of essential goods and services. Consumers pay a much higher price for the goods they consume or the services they avail of. The price rise in the oil business led to a serious fall in the budget of Indian citizens. People had to cut other expenses to manage spending on fuel for commutation, cooking, etc. This further escalated to cutting down on essential commodities. June 2021 recorded a fall in the price of food and oil, but the oil inflation in India rose to 34.8% in June 2021 from 30.9% in May 2021. This visible change is leading to various unforeseen consequences on the economic front in the country.  

Also Read: Inflationary Trends in Indian Petrol, Diesel, LPG Prices: An Analysis

Indirect impact on the other hand has a much serious repercussion. There was an unprecedented rise in the price of almost all household items. Though the transitioning of employment mode to remote or ‘Work from Home’ (WFH) helped in avoiding fuel expenditure for many, high oil prices have a ripple effect on other commodities too (Ruchi Mishra, 2018). This damaging ripple effect has been observed in the economy as the rise in prices essentially targeted the masses. The masses lowered consumption, and reliance on government aid through the PDS increased for essential products. There is a huge responsibility in the hands of the government as consumers are no longer willing to purchase goods from the open market. The immediate impact would be massive shutting down of businesses in the market domain and subsequent unemployment.  It may be that recession is not an imminent threat at the moment, definitely not an imminent danger and it might not even occur at any point, but it is something to be aware of (Michael Lynch, 2020).

There is a huge responsibility in the hands of the government as consumers are no longer willing to purchase goods from the open market.

Impact of price variation during the pandemic, compared to pre-COVID times

India, being a developing nation has always witnessed and endured the pain of intensive variations in oil prices. Due to huge dependency on imports for oil supplies, various mechanisms like the subsidy, the Public Distribution System, and the private parties had been incorporated into the economic model to negotiate the problems caused by inadequate supply. The US Energy Information Administration reports that the Oil prices were comparatively lower in 2019 than that in 2018. The price of crude oil was 57 UD Dollars per barrel, 7 US Dollars per barrel lower than 2018’s Oil price. The world was expecting the benefits of increased production in Oil Production from the OPEC countries in the years post-2019.

But the ravages of the pandemic hit the world, causing economic disequilibrium since early March 2020. During the same time, the oil business was at one of its weak points, and the prices quotations were already delivered under pressure. There was a major economic slowdown caused due to the pandemic which decreased the production rate of global gas companies (Belaid et al., 2020), A downward pressure was expected leading to a reduction in production and definitely a steep rise in prices which was hard to escape from.

The Baltic Dry Index records the variations in shipping costs. It was recorded in the Baltic Dry Index that the Union government had imposed taxes on freight charges five to six times more during the onset of the pandemic. Further, the government had increased the charges two to three times post partial opening of economic activity under strict COVID protocol in 2021. Higher shipping costs eventually increased consumer food inflation, as stated by the SBI Report 2021. In a scenario where the impact of lowered economic activity had triggered an immense number of businesses to shut down, the act of raising freight charges poses a threat to businesses’ resilience to withstand the effect of the slowdown. The rising crude oil prices and the cancellation of the meeting by the Organization of Petroleum Exporting Countries (OPEC) tied a tight knot for the Government of India. The Government tried to balance the need for revenue from excise duties even during the persistent rise in fuel inflation.

The economic shutdown has had a devastating effect on the business front wherein meagre production or constant halt had tempted the demand and supply cycles of consumer essential oils in an unequal disposition. This has created a huge vacuum in the economy hampering the growth and development of sectors. Another notable impact is by the industries that use crude oil resources to operate the machinery or to process the output. Fuel prices have continuously increased and the agencies are not able to restore the prices that are affordable to the Indian masses.

Way forward

According to the OECD, carbon pricing and fossil fuel subsidy reforms are the two policies that can be incorporated to reduce carbon emissions. There is a justification among most governments suggesting subsidies as tools to help the poor and vulnerable sections of the country in improving their energy access and affordability (Clements et al.,2013). This is also used as a method to curb inflation and alleviate poverty. But over time, it has been observed that these policies act as a denotation of the external cost raised for fuel consumption. This leads to the internalization of suitable sustainable practices to mitigate climate change as well. This would eventually lead to extensive use of renewable energy resources as an alternative to solid fuel.

Also Read: The Economics of Clean Energy

The National Policy on Biofuels that had been approved in 2018 is a lifeline. The expected benefits of the policy include a decrease in import dependency and efficient management of municipal solid wastes. This policy would result in the generation of employment opportunities and infrastructural development. Farmers would be able to capitalize monetarily from this as agricultural residues which are otherwise burnt would be converted into ethanol. The National Policy on Biofuels is an opportunity to have greater health benefits by avoiding the burning of fossil fuels and building a cleaner environment by reducing wastes.

It is more or less found under observation that there’s no escape from the spread of COVID-19 and all that society is hopeful about is the containment of the virus. It is found from the Consumer Price Index that people have started consuming comparatively lesser amounts and this is leading to a structural imbalance in the economic front due to a fall in consumption patterns. The issue can only be resolved by cutting down on the fuel and oil price by the government which will incentivize the population to expand their spending to other commodities.

Also Read: Rebooting Infrastructure: National Infrastructure Pipeline Dashboard

Opening up of the economy is another important facet as the pandemic prevails. As most of the developing nations have already brought about a functioning economy, India still shudders from the idea of a full opening of the economy. The economic slowdown and the repercussions can be resolved and the economy can be developed with proper mitigation and resolution. Fast-paced action, immediate and effective reaction needs to be incorporated in the action plans of the future to enhance the process of nation-building with complete resilience.

References

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About the author

Shreya Devarajan, a Young India Fellow at Ashoka University, is pursuing an internship under "TheRise Internship Programme" (TRIP).


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