Not the best solution but a reasonable strategy: Harsh Gupta Madhusudan on India’s petrol-diesel catch-22

It is a catch-22 situation for India – the government cannot hold on the petrol-diesel price hikes anymore, and the impending hikes could have far-reaching implications for the people.

The government is doing the best it can in the current, not-ideal scenario, said Harsh Gupta Madhusudan, Author, Fund Manager & Chief India Strategist at Ionic Wealth. Gupta speaking to Business Today TV on whether the government, in hindsight, should have adopted a different approach to fuel rates, said, “Ideally speaking, the answer is very simple, but we don't live in a simple economy, we live in a political economy.”

“Ideally, the pump prices should change every day the way they happen in the US or Europe, et cetera, where there are taxes and private players decide the prices. Having said that, given India is a per capita poor country and we have a history of control, the next best thing was to keep them broadly in line, tweak the taxes, make sure you don't issue too many oil bonds, OMC bonds,” he explained.

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Gupta said that oil prices have remained rather benign in the past few years, except for a period during the Ukraine war. “This was basically a way for the government to raise revenue, to also incentivise a movement towards hybrids and EVs, et cetera, et cetera. So kind of a Pigouvian environmental tax, if you will, which also was revenue generated,” he said.

However, Brent is now hovering in the $90-100 range and it is no longer feasible to keep it stagnant, also considering the rupee depreciation, explained Gupta.

“So with the rupee and the crude or Brent both in the nineties, as soon as the election results were announced, it was inevitable that the government had to move because the next elections are in February and you could not subsidise petrol and diesel prices at the pump for almost another year,” he said, adding that the government is making the best decision in the second-best world by increasing prices on a daily or a weekly basis.

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“So there is no headline kind of shocker, but cumulatively the price increase filters through because it's very important to pass the price signal. The government obviously cut taxes by ₹10 even before the election results to absorb some of the shock from OMCs, but it cannot do it on a permanent basis. So yeah, maybe not the first best solution, but given the reality of politics, I think it's a reasonable strategy that they're following,” he said.

Watch the full conversation here: