Small, frequent spikes in fuel prices to dent consumption, challenge growth

The recurrent increases in fuel prices over the past 10 days are eating into the margins of transporters, who will be forced to pass on the hikes to their customers.
 

This, in turn, is set to make the prices of daily consumables and other goods dearer, affect consumption, and slow economic growth, said transporters and analysts.

Freight rates on grand trunk routes have shot up 3-4 per cent month-on-month in the past few days, according to the Indian Foundation of Transport Research & Training (IFTRT).

These are set to go up further if the fuel price hikes continue.

“The incessant price hikes in small doses are like a ‘frog in boiling water’. If this continues, the freight rates will notch up to an all-time high by May,” said Jasjit Sethi, chief executive officer, TCI Supply Chain Solutions, adding, this was hitting transporters of all hues.

Sunil Sinha, chief economist, India Ratings & Research, said the fuel price hikes would have a cascading impact on economic growth.

“The daily price increases will impinge on the pockets of households. They would spend more on fuel and cut expenditure on other items. This will impact GDP as consumption demand accounts for 57-58 per cent in it.”

Oil-marketing companies (OMCs) hiked petrol and diesel prices on Thursday for the ninth time in the last 10 days. A litre of petrol in Delhi now costs Rs 101.81 as against Rs 101.01 previously, while diesel will be sold at Rs 93.07 against Rs 92.27 per litre earlier.

In Mumbai, petrol costs Rs 116.72 per litre and diesel Rs 100.94 per litre. The fuel price in Mumbai is one of the highest among the metro cities.

According to Sinha, the price adjustments that have taken place so far are not enough and more is required if the OMCs are to recover the costs.

“Even an expectation of a further price increase will impact households,” he said, adding, that once the transport prices went up, prices across the board, including those of daily consumables, too would go up.

While rising fuel prices are one part of the story, transporters looking to buy new/old vehicles will have to folk out more.

The creeping increments have affected the transporters’ sentiment adversely, said Vinod Aggarwal, managing director and chief executive officer (CEO), Volvo Eicher Commercial Vehicles (VECV). Prices of trucks across the range are set to go up from this month. VECV too will hike prices by 200 basis points from Friday, said Aggarwal.

“Despite the headwinds, the recovery of commercial vehicles will remain on track,” said Aggarwal.

Higher prices are hurting even large fleet operators, bound by monthly or quarterly contracts. They do not have an option but to absorb the hikes and take a hit on the margins. Fuel cost accounts for 85 per cent of the operating cost for a truck operator.
 

Balmalkit Singh, chairman, core committee, All India Motor Transport Committee, said the recurrent hikes would jack up prices and stoke inflation.

“We appeal to the government to review prices quarterly and bring them in the goods and services tax ambit, instead of a daily price increase,”

Prices of tyres are up, toll charges have increased, and motor insurance premiums are also set to go up next month, he said.

“There is no way transporters can absorb these costs.”

S. P Singh, senior fellow, IFTRT, said this was “much ado about nothing”. According to him, given the strong demand, the price hikes can easily be absorbed by transporters.

The diesel price was frozen for 137 days but truck rentals went up even during this period. Transporters have enough cushion to absorb the increase.