Why are petrol and diesel prices spiking if the economy is in recovery?

• India mainly relies on oil imports, which make up about 80% of its current oil consumption
• Rising oil prices also have a bearing on the Indian Rupee which reached a record low earlier this week
• India has a stated ambition of reducing its dependence on oil

Prices of petrol and diesel have risen sharply in the last couple of weeks with the both fuels touching record highs.

On Tuesday, prices of petrol had risen for tenth day straight and as of Tuesday morning petrol cost ₹79.31 ($1.11) per litre in Delhi and ₹86.72 per litre in Mumbai. The price of diesel stood at ₹71.34 per litre in Delhi and ₹75.74 per litre in Mumbai. The news comes even as the Indian government announcing impressive GDP growth numbers for the first quarter of 2018, growing at 8.2%.

Rising crude prices and falling rupee

India mainly relies on oil imports, which make up about 80% of its current oil consumption. Global crude oil prices have been on the uptick in recent weeks because of a supply shortage in Venezuela and rising demand elsewhere. Crude oil prices rose by $7 a barrel in just the last couple of weeks. Crude oil prices had been relatively stable earlier this year.

Meanwhile, the rupee has been in free fall in part because of the global oil prices and recent economic crisis in Turkey. On Wednesday, rupee posted a record low of ₹71 against the dollar. The value of Indian rupee has slipped by 10% since the beginning of the year because of fears of India’s increasing trade deficit and rising global oil prices. A weak rupee also makes it more expensive to import goods and commodities priced in US dollars.

Last year, India shifted to the practice of revising fuel prices on a daily basis from an earlier practice of reviewing twice a month. The former was enacted by Indian oil marketing companies to bring it in line with the daily fluctuations in crude oil and what other developing countries follow.

What about alternative fuels?

India has a stated ambition of reducing its dependence on oil with the government aiming to have 30% of cars running on electricity by 2030.

Biofuels derived from vegetable sources is another potential alternative however the supply currently lags because of limited availability of raw materials.

The Indian government has also been pushing for the adoption of biofuels for many years and in 2003 set the target of blending petrol and diesel with 10% of ethanol sourced from sugar molasses. Biofuel could potentially be manufactured from waste foodgrains and even rotten potatoes. However, challenges still remain for these fuels for the foreseeable future.