As the assembly elections in four states are over, there is growing speculation that petrol and diesel prices, which have been kept in check by the government despite months-long conflict and disruptions in the Middle East, are now going to be hiked. The government has repeatedly refuted such speculation. But if the disruption in the Middle East stretches on for months, the government may not have much space to keep petrol and diesel prices artificially low. The crude oil price before the Iran war began was nearly $70 dollar and has stayed mostly above $100 ever since, once even touching $126. State-run fuel retailers have taken the blow of price suppression by the government, leading to oil marketing companies suffering mounting losses.
Also Read: Let oil prices hurt: IMF cautions against govt shielding consumers
PTI reported a few days ago, citing government sources, that the possibility of a petrol and diesel price hike in the near future is not ruled out. State-owned oil firms hiked prices of commercial LPG, industrial diesel, 5-kg LPG and jet fuel sold to international airlines in keeping with the cost.
Despite crude oil staying above $100 dollars, the central government has kept the domestic LPG rates unchanged, though the price of commercial LPG (19 kg) was recently increased by Rs 993.
IMF wants fuel price hike
Amid expectations of an increase in retail prices of petrol and diesel, the International Monetary Fund (IMF) on Tuesday suggested a pass through of higher crude prices to consumers, while arguing that India had headroom to navigate the current energy shock due to the closure of the Strait of Hormuz. “They (govt) have cut excise taxes on oil. They provide some fertiliser subsidies. This can continue for some time, not much more in terms of fiscal space. At some point in time, you have to allow price signals to start to flow. And that’s something which is true for India,” IMF’s director for Asia Pacific Krishna Srinivasan said at an event organised by NCAER as reported by TOI. He also argued that higher prices would temper demand at a time when countries were facing supply constraints. For the poor and vulnerable segments, Srinivasan backed targeted subsidies.
Also Read: Petrol, diesel price hike in near future not ruled out, say govt sources
However, the government doesn’t seem to agree with the IMF analysis. Srinivasan’s suggestion that India had limited fiscal space, was countered by RBI deputy governor Poonam Gupta, who argued that in a comparative context, the country was much better placed, TOI reported. Citing data she said that India’s gross debt as a proportion of GDP is projected to decline from 83.4% in 2026 to 77.7% in 2031 when the advanced economies, middle income countries, emerging market economies and the global level will be rising. She said that India had not only seen prudent fiscal policies but had also seen good fiscal consolidation and higher growth will help its case. Gupta also pointed out that IMF’s initial growth forecast had been lower than its revised numbers and underlined that the Indian economy remained resilient in the face of strong growth and benign inflation.
Three weeks ago, the IMF had issued an unusually stark warning to governments facing the latest war-driven energy shock to let the fuel prices at the pump rise. It warned against shielding consumers from rising fuel prices through broad subsidies or price caps. The advice sounds counter-intuitive because it effectively asks governments to allow higher domestic fuel prices when households are already under inflationary pressure. But the IMF’s argument is not about accepting pain for its own sake. It is about how global oil markets adjust to shocks, and why blocking that adjustment can actually make the crisis worse. At the heart of the IMF’s position is a simple claim that energy prices must be allowed to rise so that demand falls. If governments prevent that adjustment, global prices remain higher for longer.
Also Read: OMCs push for increase in LPG, petrol, diesel, ATF prices as losses mount
Let price signals work
In April, the IMF’s Fiscal Monitor and accompanying statements by senior officials such as Rodrigo Valdes made one point repeatedly and explicitly that energy markets only stabilise when consumption responds to price. Valdes told Reuters, “We don’t have oil. We don’t have energy. Energy needs to be more expensive for everybody, so that the adjustment happens and we consume less.” He also warned about the global spillover effect of intervention. “It’s a global shock and if countries suppress the price signal, the global price will be higher,” he said. This is the central mechanism the IMF is concerned with. In a supply-constrained shock, such as the current disruption triggered by the Iran war, higher prices are supposed to reduce demand. That reduction in demand is what ultimately brings the market back toward balance. But if governments intervene to prevent domestic prices from rising, that feedback loop breaks because consumers continue to consume as if supply is unchanged. Demand does not adjust downward. As a result, the pressure on global supply remains intense, which can push benchmark oil prices even higher.
Why the IMF sees subsidies as globally inflationary
The IMF’s concern is not simply that subsidies are expensive for governments, although that is true in a separate fiscal sense. The more important point is what subsidies do to global demand aggregation. If multiple large importers suppress retail prices simultaneously, the world demand curve becomes artificially rigid. Instead of falling in response to scarcity, consumption remains elevated. This would mean oil inventories will deplete faster and spot markets will tighten even further. This is why the IMF emphasises on price signals. In its view, energy prices are not just a domestic political variable. They coordinate global consumption decisions. Valdes said that suppressing price signals prevents adjustment and keeps consumption too high relative to supply. The IMF is concerned with independent policy decisions across countries interacting to determine a single global commodity price.
So should govt let consumers suffer?
The IMF recommendation can be misunderstood. It is not arguing that governments should simply let consumers suffer the full impact of higher prices without mitigation. Instead, it draws a distinction between two types of intervention. Broad fuel subsidies or price caps reduce the retail price of energy itself. This directly interferes with the consumption decision. However, targeted cash transfers, by contrast, preserve the high price signal but compensate households separately. The consumer still sees expensive fuel and therefore has an incentive to reduce usage, but receives financial support to manage the income shock. That’s why the IMF recommends governments provide temporary cash transfers to consumers to bear the oil price shock. Era Dabla-Norris of the IMF described the current global response as relatively restrained compared to 2022, noting that governments are attempting a more disciplined way of cushioning the impact. That discipline, in IMF terms, means avoiding interventions that block price transmission.
Why the IMF is so worried
While the core argument is about price signals, the IMF’s urgency is shaped by the macroeconomic environment in which this shock is occurring. Global debt levels have risen to around 93.9 percent of GDP and are projected to approach or exceed 100 percent by the end of the decade. Interest costs have also increased sharply, limiting fiscal flexibility across both advanced and emerging economies. At the same time, the oil shock is not occurring in isolation. The IMF has cut global growth forecasts and warned that sustained oil prices above $100 per barrel could push the world economy close to recession if the disruption persists or escalates. In this environment, the IMF sees a dangerous feedback loop risk. If governments try to stabilise domestic prices through subsidies, they may stabilise consumption in the short term, but at the cost of keeping global demand elevated. That can keep oil prices higher, which then increases the subsidy burden further, creating a self-reinforcing cycle. However, fiscal stress is not the primary reason for the IMF’s warning. The central issue is whether the world allows demand to adjust to supply conditions.
Source link
#Petroldiesel #price #hike #coming #IMF
