Adverse Effects of Fuel Price Rise in Indian Business

Increase in fuel rates in India has created quite a storm in people’s lives, right from the common man to businessmen all are feeling the burn, that the price rise has dug in their pockets. So the question arises: Is oil price rise burning a hole in Indian Business?

The rise and fall of crude oil prices have been creating a buzz in the business world from the past fifteen days. On one hand, when people are trying to gulp this heavy lump down their throat, businessmen are trying to find a midway where they can tackle this problem.

According to the recent World Economic Outlook (WEO) by the International Monetary Fund (IMF), roughly 80% of the recent oil price increase was caused by deterioration in supply conditions (particularly faster-than-expected deterioration in Venezuelan output). This, however, is not the only study on the factors leading to higher crude prices. The “Oil Price Dynamics” report published by the Federal Reserve Bank of New York finds that less than two-fifths of the rise in oil prices since the beginning of 2018 was on account of supply-side factors. These contrasting studies lead to uncertainty regarding the sustainability of higher crude prices.

Other than just affecting the daily transport of goods from one place to another, it is also affecting the local businessmen who depend on transport for pushing their business ahead. Here is the list of businesses getting affected due to the sudden surge in oil prices:  

Hike in excise duty on import products:

India is the third biggest oil consumer in the world. In 2017, India’s oil imports rose by 1.8 % where a record of 4.4 million barrel per day has been recorded. India’s major share of imported crude oil is used in producing energy. The sudden rise of crude oil price will brunt the import bill to skyrocket.

According to a news report where Kunal Agrawal, Bloomberg Intelligence analyst has said, “Crude’s rally may force the Indian government to choose between cutting excise duty on petroleum products or re-introducing fuel-price caps to control inflation.”

The price rise of Petroleum products:

In the coming months, the price of the air-conditioner, fridge, washing machines and microwaves is also likely to get high by 2-5% due to the depreciation of the rupee, price hike of crude oils and rates of key raw material steel and copper hardening up as reported by one of the leading news reports.

There are many cosmetics, other products where petroleum is used in a high amount such as balms, paints, adhesive products are going to face the wrath of increase in crude oil price.

In a news report which was published earlier today suggests that prices of daily-use consumer products such as packaged foods, detergent, and cooking oils may increase by 4-7%.

“There could be 4-5% increase in prices across the sector in the next two quarters if crude prices remain at existing levels,” said Saugata Gupta, MD of Marico.

Paint industry which uses oil derivatives of about 60% of its raw material is likely to get affected. More than the bigger brands, the small brands are going to feel the burn.

Lalit Malik, Chief Financial Officer has said, “Rising oil prices impact us directly and definitely puts pressure on profit margins. We are being cautious about pricing and closely monitoring the trend.”

Adhesive companies use another crude derivative that is Vinyl Acetate Monomer (VAM), which makes up to 35-40% of its raw material cost.