- 6 weeks ago
Prices of commercial LPG were cut by Rs 183.50 per 19-kg cylinder on Wednesday – the first reduction this year following a series of hikes in the wake of the West Asia crisis that caused energy supply disruptions across the globe.
Category
🗞
NewsTranscript
00:00that oil marketing companies have announced their first price cut since the U.S. attack on Iran
00:05in February, triggering a global energy crisis. Restaurant owners have got some relief today
00:12as commercial LPG prices were reduced by 183 rupees and 50 paise. A small cut in domestic
00:19jet fuel prices also by 5 rupees per litre. Naira Energy, India's largest private fuel retailer,
00:27has also cut petrol prices by 5 rupees per litre and diesel by 3 rupees per litre.
00:34Naira was the first company to hike fuel prices when the Gulf War started. Global analysts now
00:39expect the biggest quarterly crude price drop since the pandemic if the U.S.-Iran deal holds.
00:47All of which leads me to the questions I want to ask right at the top of the show.
00:51Energy crisis, is the worst now over? Is it time to cut fuel prices for consumers as well?
00:59Should the government first wait for clarity on troops?
01:03Joining me now is one of the country's leading economists, Dr. Sajid Chinoy, Managing Director,
01:08Chief India Economist J.P. Morgan and part-time member of the Economic Advisory Council to the
01:13Prime Minister joins me. Sajid, we've been tracking oil prices since the war began in the end of February
01:20in West Asia. Now, for the first time since then, we're seeing the government actually cutting prices,
01:27yes, only of commercial cylinders. But do you therefore now see, hope, that we will see a fall
01:34in global crude and the benefits will be passed on to consumers? Or is it too early to speculate on
01:40that?
01:42Good evening, Rajdeep. I think the first thing is just to give a huge sigh of relief. We've been
01:46discussing this for the last four months, and I think both India and the global economy has dodged
01:52a bullet, right? If we had to say back in March that the state would have been closed for three
01:56months, you know, the worry was very much that there'd be widespread shortages, crude prices
02:01would go to $150 a barrel. Thankfully, none of that happened. And none of that happened because
02:07there was a sharp and broad-based drawdown in global inventories. So hopefully the worst is now over.
02:14I think it's a little bit premature to say that global crude prices will stay at these levels or
02:19go down further, precisely because the shock was cushioned by this large drawdown in inventories.
02:26And as prices go down, you'll see inventories being restocked in the coming months. So crude prices may
02:32go back up close to $80 a barrel. But the worst is now at least behind us. And I will
02:38say that there
02:39will be some economic hit for sure. You know, the government finances have taken a hit. You know,
02:45prices, retail prices have gone up for energy, as you pointed out. Input costs for firms have increased.
02:51So there will be some hit in the economy, but the hit will be more contained than we had feared
02:55back
02:55in March. Now, as regards price cuts, Rajdeep, I think A, we'll have to wait for a little bit longer
03:01for two reasons. One is, the first question is, who bore the brunt of the shock? And we saw that
03:09the government cut excise duties by 10 rupees. Households saw an 8 rupee price increase.
03:15Commercial LPG saw a large increase of about almost 80%. And OMCs, despite these actions,
03:22saw very large losses in the month of March and April, because retail prices only went up in May.
03:28So just as there was equitable burden sharing in the last three months, I think the relief going
03:35forward will have to be equitable. I think the first order of business is just to ensure that
03:40those oil marketing companies that made very large losses in March and April, now recover some of those
03:46losses. For the first time, they're making more money than the cost of crude. But this is to offset
03:51some of those losses. So I would argue, A, let's wait a couple of months for some of those losses
03:56to be
03:57offset. B, let's wait and see if crude prices sustain at these levels and don't go back up as global
04:03inventories are replenished. And then certainly, if crude remains at $70 a barrel, there will be scope
04:10both to cut retail prices and to raise government excise duties. And the macro context in three months
04:17should determine, you know, where the relief is most, you know, passed on.
04:26Let's just look for a moment at Brent crude oil prices, just to give us the viewers a sense of
04:31how
04:32it's, it's gone over the last four months since the war began. February 27, the day before the war
04:38began, it was $73 a barrel. By March 13th, it had climbed to $104. April 7, $109. Then by March,
04:48May 18th,
04:49it went to its highest level, $111. This is when there were fears that the war could become an even
04:54more prolonged one. But the month of June has seen a gradual decline in oil prices. June 7th, it was
05:0293. June 12th, it came down to $88. And as of July 1, it's down to $72.5 a barrel.
05:10So you've
05:11seen how it seesawed over the last four months. And finally, we are seeing global crude prices
05:20cooling down. So, so Sajid, do you get a sense, therefore, that the government has to wait to see
05:26A, whether the truce holds, and B, whether the oil marketing companies you're saying are
05:31in a position to actually lower retail prices. Because the general belief is, it's not about
05:37the OMCs, it's actually about the government wanting to make profits, it is argued by charging
05:44excessive fuel taxes. It's the taxation system rather than global prices that determine the
05:52government's choices when it comes to retail fuel prices.
05:56Sajid, I think this is just seen in two dimensions. I think the near-term dimension is what happens
06:01in the next three to six months. As I said, first, we need to ensure that those oil marketing
06:05companies, ultimately, their profits or losses go back to the fiscal deficit, recover some of those
06:11large losses they made in the month of March and April. Now, let's assume that happens in the
06:15next few months. The next question is…
06:17So, they made huge… If I may just intervene, they've also made huge profits. They've also
06:23made huge profits in the past. So, why should they not pass the burden, the benefit to the
06:28consumers?
06:29So, Rajdeep, that's right. So, let's step back. I think the bigger question here is,
06:33how much does the fiscal deficit take, both directly, indirectly, and how much does the
06:37household take? Let's go back to last year, in the year 25-26. At that point, oil prices
06:43were lower. And you're right, oil marketing companies were making profits at that point.
06:48So, the question was, why weren't oil prices cut then? But remember what happened in 25-26.
06:54You first had income tax cuts in the February budget. Then you had large GST cuts in September.
07:00So, what happened with the budget, interesting last year, was government tax revenues to GDP
07:05fell much more than expected. And capital expenditure for the government last year only grew at 2%.
07:12It was slated to grow at 10%. But both because of direct tax cuts and indirect tax cuts, there was
07:18no space for capital expenditure. So, we have to look at the bigger picture here. Now, let's look
07:22forward that four months from now, let's assume crude prices remain at $70 a barrel. The government
07:28will then have a choice. Either we cut retail prices, and there's a good case for that. If I think
07:33that we have to look at another risk, the energy risk is behind us. But there is a strong possibility
07:39of an El Nino. In fact, there is now a 65% chance of a super El Nino playing out
07:46around the world and
07:47in Asia and in India this year. If the El Nino comes to pass and food inflation picks up sharply,
07:54I would strongly argue that at that point, the government should cut diesel and petrol prices
07:59because we don't want an inflation spiral in the economy. We don't want inflation expectations to go
08:04out. But on the other hand, we have to also remember that if the government were to pass on
08:09all the benefits to the household this particular year and not recoup some of the excise duty cuts
08:17that were made in March, then we could face another year where public investment and capital expenditure
08:24slows very sharply. And in an environment in which private investment is still not picked up on a broad
08:30base, you know, cutting public investment also has its disadvantages. So I think this is a more
08:36complicated macro story. The context will depend on whether we're stuck with food inflation later
08:41of the year and how government tax revenues are doing. But I'll make one final point. Your larger
08:45point is well taken. I think if you look at the ratio of indirect taxes to total taxes in India,
08:52over the last 20 years, this has been too high. And we know that indirect taxes are regressive.
08:57The incidence falls too much on the bottom of the pyramid. So in the long run, what do we need
09:02to
09:02do? Reduce indirect taxes. We started by cutting GST. But this has to be done in a fiscally neutral manner,
09:09which means, you know, other taxes have to go up or non-tax revenues have to go up because all
09:14of us will
09:15agree that India needs more spending on health, more spending on education, and we can't tolerate
09:21higher fiscal deficits because that will simply push up the cost of borrowing for the household.
09:26So there are no easy choices here, Azeep. This is a trade-off, and it will depend on where we
09:31are
09:31with the macros three or six months from now.
09:37It also, of course, depends on the fact that the Strait of Hormuz issues are resolved. While traffic
09:43has picked up noticeably in the days after the MOU was signed between Iran and the United States,
09:49the fact is that there is concern still that we are still well below what it was at peak activity.
09:57For example, the live data as of today, latest data shows only five vehicles have, five transits have
10:09been made in the last 24 hours with 400 vessels still waiting. So presumably, the big X factor is that
10:16there will be no further jolts to the truce process. That's the hope, I'm presuming.
10:23That's right, Rajdeep. And this truce is very fragile. A, B, you know, now the Strait of Hormuz,
10:30for all practical purposes, is governed by Iran. So at any point, things could flare up. And C,
10:36as I mentioned, even if the Strait opens, initially crude prices will come down because there's a glut of
10:42oil that hits the market. But because some of the buffers we got the last three months was China
10:48in particular, and global inventory is running down, those inventories will have to be refilled. So
10:53the good news is the worst is over, but we need to be a little bit more patient to see
10:57if crude prices
10:58remain here, A. B, to just ensure that oil market, oil marketing companies recover some of the large
11:04losses in March and April. And then clearly, there'll be an opportunity for either prices to be cut or excised
11:11due to be raised, and some combination thereof. But we need to be a little bit more patient.
11:19Of course, what we've seen also, Sajid Chinoy, is the U.S.-Iran war pushing India's crude oil imports from
11:27Russia to an all-time high. Russia supplied over 50% of our imports in June 2026. That's over 240
11:35million
11:36barrels in four months post-conflict, far ahead of UAE and even Saudi Arabia. Do you look, do you see
11:44therefore that one of the lessons we had to learn from the last four months is the need to revise
11:50India's oil procurement strategy, ensure diversification. That's been one of the big lessons
11:56that we've learned.
11:58Rajdeep, I would go beyond that. And I think it's really important that even as pressures abate,
12:03we don't forget the important lessons of the last four months. What are those lessons? First is we're
12:09living in a new world. This is not the world of the last 80 years. This is the world in
12:14which
12:14geopolitical shocks are much more frequent, trade is weaponized, and supply chains are more fragile.
12:20In that world, India needs to do at least three things. One is for mission-critical inputs and
12:26intermediate goods like energy. We need to have greater physical buffers. We've seen what China
12:32did. China dramatically reduced its imports. It was not reliant on imports the last three months.
12:39It was not buying crude at $120 a barrel because it had significant physical buffers, not just of
12:45energy, but agricultural goods, industrial metals, rare earth. So I think the first lesson is let's
12:51identify all the choke points in the economy. And then A, build physical buffers of LPG,
12:58you know, of crude, you know, going forward, number one. Number two, we should be diversifying
13:05imports. In the last two months, we've got far more LMG from the US. We're buying more LPG from
13:12Australia. That should have always been the strategy where we reduce concentration risk
13:16by diversifying imports. Three, we need to start hedging prices. You know, I've been saying for
13:23the last decade that in financial markets now, we can actually use financial instruments to hedge
13:29prices. Mexico is a large energy exporter. It pays 0.1% of GDP in its budget to actually buy
13:36put options
13:37so that it fixes the price at which it's selling. There is no uncertainty then in Mexico all year
13:44about what the cost of energy is going to be in terms of inflation or the fiscal deficit or the
13:49current account deficit. It's called the Hacienda hedge. So I would argue this is a wake-up call for
13:54all of us that build more buffers, diversify more imports, hedge at least some fraction of prices where
14:01we can. And I would go beyond that. I would say some of the concentration risk is not limited to
14:07energy.
14:08A lot of our risk is also related to China. Almost all of our polysilicon comes from China.
14:15You know, we've got other things, lithium-ion batteries. So we want to get more FTI from China
14:19to ensure that those imports cannot be weaponized.
14:26Let me leave it there, Dr. Sajid Chinoy. We'll wait and see whether the government is in a position or
14:32believes it's in a position now to ensure that the oil marketing companies are able to pass on the
14:38benefits of those lower global crude prices onto the consumer. That's what we've been waiting for
14:43over the last few months. Appreciate you joining us and giving us as always an explainer to break
14:50down the big picture. Thank you so much. Thank you.
Comments