It’s been a waterfall like slide for the rupee against the US dollar over the past few months. Last week, the rupee crashed below the 72-mark to end at a life low of 72.69 against the US dollar on growing fears of a rebound in oil prices and escalation of global trade war. The domestic currency’s previous all-time closing low was 68.73, touched on November 24, 2016. Earlier in June, when the beleaguered rupee crashed to breach the key psychological level of 69, the fall was attributed to multiple headwinds like global cues and concerns related to inflation and fiscal slippage. Since then, a weak rupee and soaring crude prices have been a cause of rising worries for the government.
The Indian currency has depreciated around 14 per cent versus the dollar so far this year; 7 per cent of its value was lost from June to September. Though it is not the only currency that is falling, the rupee is the worst performer among emerging market currencies in Asia. The depreciation is part of a wave of selling in emerging market currencies besides other factors like rising current account deficit (CAD), widening fiscal deficit and rising crude oil prices. What is also pulling down the value of rupee is the weak global trade sentiment and higher demand for the US dollar.
The cause of concern for India is the worsening balance of payments position. Rescuing the rupee and controlling CAD seem to be the government’s immediate priority. Morgan Stanley expects the CAD to widen to 2.5 per cent of GDP in the current fiscal year. The US investment bank also expects inflation to accelerate, prompting the RBI to hike interest rates in its next policy review in October, after a 0.25 per cent upward revision in its last policy review in August. India’s foreign reserves are healthy at $400 billion. But global financial conditions have tightened. As the US economy and dollar have started strengthening this year, foreign investors have pulled nearly $10 billion from Indian markets till June this year.
Any boost to exports from weaker rupee will be offset by inflation and CAD, as India imports nearly 80 per cent of its oil requirements. Therefore, any optimism that the falling rupee would assist exports should be tempered with caution, as high crude prices are hurting India. Under increasing attacks from the Congress -led opposition parties, which organised a nationwide bandh on September 10 to protest against soaring fuel prices, plummeting rupee and rising crude prices will continue to rattle the government – both politically and economically. Since prices of petrol and diesel have been deregulated, under dynamic pricing mechanism, fuel prices are supposed to be market-driven as they are linked to international crude prices and rupee-dollar exchange rates. But in reality they are not.
India’s fuel prices are currently among the highest in Southeast Asian countries, largely because of excessive taxes – 84 per cent comprising central (excise duty) and state (VAT) taxes. The Congress-led opposition has urged the government to reduce taxes to bring down retail cost of petrol and diesel. However, the government has rejected the opposition’s demand. In economic terms, reducing excise on fuels will disturb fiscal maths. But politically high taxes hurt the government because the common man is feeling the heat. The Opposition is not wrong when it says that fuel prices should not be so high when the crude oil price is around $75 a barrel as compared to $107 in May 2013 when retail petroleum prices were far lower.
Throughout the UPA regime, oil prices rose in tandem with international crude prices. However, during the NDA regime, retail oil prices have gone up by 13 per cent, despite a 34 per cent fall in crude prices from 2014 to 2018. This is because the government raised excise duty nine times on petrol and diesel during this period. Instead of passing on the benefits to consumers, the government took advantage of the crash in international oil prices to boost its revenue, reduce fiscal deficit and support its expenditure on welfare schemes. In 2014-15, the total revenue from petroleum products was Rs 1.72 lakh crore, which increased by nearly 100 per cent in four years to Rs 3.43 lakh crore in 27-18. This happened despite low crude prices.
Retail prices of petrol and diesel are determined by three factors: prices of crude in the international market, value of rupee versus dollar and taxes on petroleum products. During the current NDA rule, there has been little correlation between prices of crude in the international market and domestic retail prices of auto fuels. The government has denied the benefits of subdued crude prices to retail consumers and continues to show its unwillingness to reduce taxes on petrol and diesel. Apart from subdued crude prices, the rupee has also been a fairly stable currency against dollar. Since mid-2014, the rupee has depreciated by around 20 per cent. This suggests that despite rupee’s consistent behaviour against dollar, retail consumers have paid higher price for petrol and diesel.
In 2013, the Congress-led UPA faced a far bigger problem than the current BJP-led NDA is grappling with. The macroeconomic numbers are more stable now and the government is in better position to deal with the situation. Yet the government is unwilling to reduce taxes on auto fuels.
Politically, the Opposition can’t be faulted for asking why retail prices of petrol and diesel should be so high when crude prices are lower. In 2013, the BJP and its prime ministerial candidate Modi had raised a ruckus over high oil prices and depreciating rupee. Now the prime minister is silent as his government faces a rerun of the situation that the UPA faced in 2013-14, while the Congress is doing the same thing that the BJP did in 2013.
A L I Chougule is an independent senior journalist.