Small and frequent spikes in fuel prices reduce consumption and challenge growth

Frequent increases in fuel prices over the past 10 days undermine the margins of carriers, who will have to pass on the increases to their customers. This, in turn, is set to make the prices of everyday consumables and other goods more expensive, affect consumption, and slow economic growth, carriers and analysts say.

Freight rates on major major routes are up 3-4 percent month-on-month in the past few days, according to the Indian Foundation for Transport Research and Training (IFTRT). These prices are set to rise further if fuel prices continue to rise.



“Continuous price increases in small doses are like ‘a frog in boiling water.’ If this continues, freight rates will reach an all-time high by May,” said Jasjit Sethi, CEO of TCI Supply Chain Solutions.

Sunil Sinha, chief economist at India Ratings & Research, said higher fuel prices would have a cascading effect on economic growth. “The daily increases in prices will affect households’ pockets. They will spend more on fuel and reduce spending on other items. This will affect GDP as consumer demand accounts for 57-58 percent of it.”

Oil marketing companies raised gasoline and diesel prices on Saturday. Rise of 80 baisas per liter brought the total increase in rates in the last 12 days to Rs 7.20 per liter. Petrol in Delhi will now cost Rs 102.61 per liter compared to Rs 101.81 previously, while diesel prices have increased from Rs 93.07 per liter to Rs 93.87.

According to Sinha, the price adjustments that have occurred so far are not enough and more is needed if OMCs are to recover costs. “Even the expectation of another price increase will affect families,” he said, adding that once transportation prices go up, prices will generally go up, including the prices of daily consumables.

While higher fuel prices are part of the story, carriers looking to buy new/old cars will have to gain more. Vinod Agarwal, Managing Director and CEO of Volvo Etcher Commercial Vehicles (VECV), said the creeping increases affected the sentiment of carriers negatively. Truck prices are set to rise across the range this month. Aggarwal said VECV will also raise prices by 200 basis points from Friday.

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