India is Asia's third-biggest oil consumer, and imports 70 per cent of its petroleum needs. Although crude oil has doubled from a year ago, and the Indian Rupee has managed to lose 5.5 per cent against the Dollar this year, New Delhi has only permitted just one increase in retail fuel prices in 20 months.
India's widely-tracked wholesale price index was 7.82 per cent higher in May from a year ago, the highest in three-and-a-half years. It would be in double-digit territory without the price controls on fuel.
India's big-3 oil refiners - Indian Oil, Hindustan Petroleum, and Bharat Petroleum - have borne the brunt of the crude oil spiral. Now they are expected to report combined losses of 1.8 trillion Rupees for the past year ($421bn) from selling fuel below cost.
Oil companies, which bear the brunt of the price-control mechanism, are compensated partially through subsidies from upstream companies and oil bonds from the government. Now India's petroleum ministry is pitching for a reduction in the taxes and duties that account for about 55 per cent the retail price of petrol.
But the government earned a whopping Rs 71,000 billion in 2006-07 from taxes and duties on petroleum products. Thus, the Finance Ministry might object to a reduction in petrol taxes, which constitute such a big chunk of the government's revenues.
Like the People's Bank of China, the Indian central bank prints local currency - in this case Rupees - to exchange for US Dollars bought on the foreign exchange market from export firms building up huge profits from US consumers.
The Reserve Bank of India has built-up a sizable stash of foreign exchange reserves now totaling $315 billion. This massive build-up of FX reserves can help India to cope with major external shocks, such as the surge in oil prices. In the past sixteen months, India's imported 121 million tons of crude oil crude oil, up 9 per cent from the same period a year earlier, and its oil import bill jumped 40 per cent to $68 billion.
The Bank of India also bought $17.5 billion since the start of 2008 to keep the Rupee from gaining against the Dollar, which is inflating the broad "M3" money supply at a 22 per cent annualized rate. Combined with soaring food and energy prices, this threatens to ravage its economy with hyper-inflation and social unrest.
India's central bank is relying on cash management tools rather than interest rates to fight inflation, lifting the bank's reserve ratio to 8.25 per cent - its highest in seven years - to force commercial banks to drain a token amount of liquidity away from new lending.
Image: An petrol pump attendant at work. | Photograph: Diptendu Dutta/AFP/Getty Images
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