Last week, the Centre hiked retail petroleum product prices after a gap of four years. This was expected, since the government had been warning about high crude prices, and how public sector oil marketing companies (OMCs) had been bleeding heavily due to under-recoveries. It was also expected that this would happen after the results of the five Assembly elections. But the Prime Minister’s appeal for austerity due to the drain on foreign exchange, the sharp depreciation of the rupee in recent months and the April’s inflation prints point to a much deeper problem that India could have addressed decades earlier — the country’s inadequate strategic petroleum and gas reserves. India did build out a strategic petroleum reserve (SPR) of about 36.7 million-39 million barrels, a programme conceived following the post-1991 vulnerability and formalised in the early 2000s. But today, this covers about seven days of consumption demand at 5.5 million barrels per day (mbpd). Combined with inventories of OMCs and import cover, this amounts to more than 70 days of stock. But over the years, India has emerged as the world’s third-largest automobile market after the U.S. and China, and a comparison with those nations reveals the scale of India’s vulnerability.

While the U.S. built its SPRs in the aftermath of the 1973 oil shock — which, at 714 million barrels, is 18 times larger than India’s — China’s roughly 900 million barrels is even larger. The U.S. has about 400 million barrels currently in its reserve system, providing it with roughly 20 days of consumption. The country has emerged as the world’s largest oil producer in the past 10 years with an output of about 13 mbpd and a commercial system wide inventory, pushing it above the 90 day-mark recommended by the International Energy Agency for reserves. The same applies to China, which is comparable with India as a more oil import-dependent nation. These numbers become even starker when compared with reserves for liquefied petroleum gas (LPG) and liquefied natural gas (LNG), where India is most exposed. India has about 1.4 lakh tonnes of LPG storage, while its daily consumption is about 80,000 tonnes — more than half its reserve capacity. As for LNG, India largely relies on stocks at regasification facilities of Petronet LNG and BPCL, without any underground storage for a fuel vital to produce fertilizers. Both the U.S. and China have heavily invested in underground LNG storage. The EU was quick to adapt following the Russia-Ukraine war as it drew down its dependence on Russian gas. These reserves have enabled advanced economies to hedge against supply disruptions by relying on long-term contracts at times of supply disruptions, cushioning them from spot market spikes. As for China, its defiance of American sanctions against Russian oil has paid off handsomely. India would have benefited too, had it maintained greater strategic autonomy.

India’s April retail inflation, at a 13-month high of 3.48%, is only marginally higher than its March print of 3.4%, and continues to remain deceptively benign. Wholesale inflation has more than doubled to 8.3% in April from 3.88% in March — a 42-month high — signalling that substantial upstream price pressures are still working their way through the economy. Unsurprisingly, the spike in the Wholesale Price Index (WPI) has been led by soaring fuel and power prices, which rose 24.71%, while petroleum and natural gas prices surged 67.2%. This clearly indicates that the full impact of rising energy costs has not yet been passed on to end-consumers. However, such a pass-through now appears imminent. Union Petroleum Minister Hardeep Singh Puri recently indicated that the Centre may have little choice but to raise retail petrol and diesel prices, with public sector oil marketing companies reportedly absorbing “under-recoveries” of nearly ₹30,000 crore a month since the U.S.-Israeli war with Iran began. Any increase in retail fuel prices will have economy-wide implications.

April retail inflation has already been driven chiefly by food, with the Consumer Food Price Index rising to 4.2% from 3.87% in March. Predictably, restaurants and accommodation services witnessed among the sharper increases, reflecting the cascading effect of rising commercial LPG prices. The price of the widely used 19.2 kg commercial LPG cylinder has risen by roughly ₹850-₹1,000 over revisions since the conflict began, while the 5 kg canister has reportedly seen increases of over ₹200 in several markets. The canister is extensively used by migrant wage labour across the country, directly feeding into food basket costs and potentially dampening consumption demand. This comes even as Prime Minister Narendra Modi has appealed to people to refrain from “extravagant spending on weddings and travel abroad” and to cut back on buying precious metals for a year. Consequently, the Centre doubled import duties on gold and silver in an attempt to discourage safe-haven investments and ease pressure on the rupee, which has depreciated by nearly 8.5% against the U.S. dollar in the past two-and-a-half months since the conflict began. For context, the rupee had depreciated by roughly 2%-3% annually on average over the previous five fiscal years. The current slide is therefore exceptionally sharp. It is increasingly evident that retail inflation is bursting at the seams and will likely find fuller expression in the months ahead. The sharp divergence between the Consumer Price Index and WPI suggests that producers are still absorbing a significant share of rising costs, a situation that is unlikely to remain sustainable. This leaves the Reserve Bank of India with limited room but to eventually tighten monetary policy in order to keep inflation within its tolerance band of 2%-6%. What is unfolding is not merely transient inflation driven by commodity volatility, but also broader systemic inflationary pressure, with limited manoeuvring space for both the government and the central bank.