India Covid lockdowns curb impact of record fuel prices

Surging retail fuel prices in India are yet to have much impact on consumption as Covid-19 lockdowns curb mobility, but they could limit demand recovery when restrictions are lifted, industry participants and analysts said.

Retail gasoline prices are at around 95 rupees/litre ($1.30/l) in Delhi and a record high of about Rs101/l in Mumbai this week. Higher global crude prices, and fuel tax increases last year have driven pump prices higher.

"The historically high prices of fuel will have a marginal impact on fuel consumption, as consumption will be only for essential usage" during current lockdowns, All India Motor Transport Congress (AIMTC) secretary general Naveen Kumar Gupta said.

"Mobility is already disrupted and will be further skewed due to the high cost of fuel," he said. AIMTC represents truckers and private bus operators across India.

Local authorities have imposed lockdowns and curfews to curb the spread of the coronavirus, although a fall in new cases in recent weeks has led to some of the restrictions being lifted, including in major cities such as Delhi and Mumbai. Indian refiners have also started raising run rates amid signs of a potential recovery in demand.

Lower demand makes it difficult to isolate the impact of higher prices, but any rebound in consumption will be slowed by the need to pay more at the pump, ratings agency ICRA vice-president and co-head of corporate ratings Prashant Vasisht said.

Diesel in particular is a price-sensitive fuel and demand will be affected by record prices, Yogesh Patil, senior research analyst at Reliance Securities, said. Diesel and gasoline demand is likely to recover this month compared with May, but will be lower than in June 2019 before the pandemic, he said.

High prices could cut longer-term diesel demand growth by 3pc compared with previous expectations, Patil added.

India's motor fuel demand fell by around 20pc in May from the previous month, according to data compiled by state-controlled refiners that account for around 90pc of the country's fuel sales.

But consumption is likely to recover from July as lower coronavirus cases and a vaccination programme support consumption, the chairman of state-controlled refiner Hindustan Petroleum MK Surana told Argus last week.

A rise in personal mobility in line with the gradual phasing out of lockdowns should keep gasoline demand at 7-9pc in the fiscal year that ends March 2022, despite an increase in prices, Hetal Gandhi, director of Crisil Research, said.

But sustained high gasoline prices in the medium term could hasten the shift towards compressed natural gas as an alternative motor fuel, she said. Gasoline demand growth could slow to an average of 5-7pc/yr between the 2021-22 and 2024-25 fiscal years, down from 8.2pc/yr in the four years to March 2020, she said.

Taxes account for around 60pc of transport fuel prices in India. Oil minister Dharmendra Pradhan this week blamed the increase in fuel prices on rising global crude values, which passed $70/bl this week. Fuel should be brought under India's nationwide goods and services tax regime, he said, in a change that would probably reduce retail prices.

The high retail prices are becoming a major political issue, with the opposition Indian National Congress planning to stage a protest against rising pump prices this week.

High fuel costs add to concerns about inflation, which is already increasing because of rising food prices. "The common people are badly hit by inflation… with unlockdowns, demand will shoot up and this will have even more of an impact," Ajay Kedia, director at Kedia Advisory in Mumbai, said.

By Sathya Narayanan