India’s record pump prices of gasoline and diesel are the newest threat to the economy’s nascent recovery, as high local taxes on retail fuel risk fanning inflation and driving a wedge between the objectives of fiscal and monetary policymakers.
Gasoline prices were at an all-time high of 97.6 rupees ($1.3) a liter in Mumbai Tuesday, while diesel -- the bellwether of industrial activity -- sold for a record 88.6 rupees, data from state-run Indian Oil Corp. show. Taxes make up more than half of that cost and represent a sore point for the inflation-targeting Reserve Bank of India, which has vowed to keep borrowing costs low for as long as needed to support economic growth.
“Persistently higher prices could lead to a generalized inflationary environment, making it difficult for the RBI to hold on to its growth commitment," said Priyanka Kishore, chief India and South-east Asia economist at Oxford Economics in Singapore. “Rising fuel taxes, alongside the pick-up in global oil prices, could threaten India’s recovery."