Crude was cheaper. Why didn't fuel prices drop? Economist Montek Singh explains

Montek Singh Ahluwalia, economist and former Deputy Chairman of the Planning Commission, has backed the recent fuel price hikes, saying passing on rising global oil costs to consumers was "essential" and that there was "no way of avoiding it".

Ahluwalia said failing to raise fuel prices in response to soaring crude oil costs would have sent the wrong signal. "The passing on the price hike was essential. In fact, failing to do so would have given the impression that we don't know how to manage the situation," he said while speaking to India Today TV.

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His remarks come after petrol and diesel prices were raised for the fourth time in less than two weeks. Petrol prices increased by ₹2.61 per litre and diesel by ₹2.71 on Monday, taking cumulative hikes since May 15 to nearly ₹7.5 per litre. In Delhi, petrol now costs ₹102.12 per litre, while diesel is priced at ₹95.20.

When asked about the gradual hike, Ahulwalia said: "Whether these things are done in a slow manner, in the past, we've also done things gradually. So, if it's easier to do it in two or three stages, I have no problem with that." 

Ahluwalia said policymakers must prepare for the possibility that oil prices could rise further as uncertainty persists over developments in West Asia and the Strait of Hormuz.

"We need to look further ahead because actually we don't really know how deep this crisis is going to be," he said. "The country should be ready that if oil prices increase further, then those increases would also have to be passed on."

While governments can absorb part of the burden by sacrificing revenue, he warned that doing so would worsen the fiscal deficit.

"To some extent, the government can cushion that if it takes the hit on its own revenues. But that really worsens its own fiscal deficit, which means it has to do something else to cut other expenditure," he said. "But, this is essential. There's no way of avoiding it."

When asked why consumers did not receive the full benefit of lower crude prices in the past, Ahluwalia said this was "a very valid point", but added that this was why the government slashed the excise duties on petroleum.

However, Ahluwalia added that fuel pricing was more complicated than it appeared. He said that India never fully moved away from government-managed fuel pricing despite reforms aimed at dismantling the administered price mechanism.

"Many years ago, we produced this theorem that we had dismantled the administered price mechanism, but actually, we never did. It's still effectively a government-fixed price, and we should make it transparent."

At the same time, the noted economist said the debate was more complex than simply lowering taxes, as higher fuel prices could also support the transition towards cleaner alternatives such as electric vehicles.

"It's true that the tax burden in India has been higher than in many other countries. But, many people also say that if you want to get away from petroleum to, let's say, electric vehicles, keeping a high price for petroleum products, diesel, and petrol is a good thing," he said.

Global crude prices had surged sharply in recent months following the Iran conflict and disruptions around the Strait of Hormuz, a critical route for global energy supplies. 

On March 27, almost a month after the war began in West Asia, the Centre reduced excise duty by Rs 10 per litre on both petrol and diesel. This decision was taken in response to the rapid rise in international crude oil prices, which had surged from approximately $70 per barrel to $122 per barrel.