Why the summer of 2018 may sting Indian household budgets

Not the best days of their lives.
Not the best days of their lives.
Image: Reuters/Adnan Abidi
We may earn a commission from links on this page.

The Indian summer sun is known to sting. The meteorological department has already predicted an intense heatwave and above-normal temperatures between April and June this year.

But that’s not the only bad news for Indians who are also likely to face the heat on a different front: the cost of living.

Electricity, food, vegetables, edible oils, fuel, and transportation are all likely to get dearer in the coming months, according to estimates by various agencies tracking the economy.

Power heat

As temperatures soar, makers of air conditioners (AC) expect a sharp spike in sales. But the cost of electricity, too, is looking north.

“The monthly market clearing price at the Indian Energy Exchange (IEX) has spiked 25%, from Rs3.20 per unit in January this year to Rs3.97 in March, taking the average cost to Rs3.43,” rating agency Crisil said in a report on April 03. The market clearing price is the rate at which the demand and supply of goods, in this case electricity, are the same. It is also called the equilibrium price and, at least in theory, markets tend to move towards this. 

The average cost of electricity in March 2018, before the peak summer demand, was at least 37% higher compared to the same time both in 2017 and 2016.

Monthly peak prices on power exchanges this year have averaged at Rs7.1, almost twice the levels in fiscal 2017, according to Crisil.

The country’s power plants are producing less electricity than peak demand. The shortfall in February 2018 (pdf) was double that of the deficit a year earlier for several reasons. “These (reasons) include unmet and suppressed demand, no new thermal capacities announced in the past two years, and…mismatch with (the) renewable energy generation curve and insufficient domestic coal supplies,” the Central Electricity Authority reportedly said.

In all, the cost of electricity will rise just when Indian homes need their ACs the most—and that’s exactly when global crude oil prices could add fuel to the fire.

The petrol bomb

The worldwide benchmark prices for crude oil have hit their highest in four years and are still rising. Fuel prices in India are already at an all-time high and the government has reportedly ordered state-owned retailers to refrain from further hikes. While reports say that the firms may absorb losses of up to Re1 per litre, the odds are still stacked against consumers.

If prices rise further, so will the cost of transportation, which will reflect on prices of essential commodities, in turn fueling inflation further.

On a sticky wicket

While the rate of food inflation has seen a seasonal decline in the last two months, it is likely to pick up again soon, according to the Reserve Bank of India (RBI). ”…inflation expectations of urban households remain elevated, according to the March 2018 round of the Reserve Bank’s survey. Inflation expectations three months ahead and a year ahead increased by 30 bps (one basis point is a hundredth of a percentage point) and 10 bps, respectively,” the latest monetary policy review says.

Edible oils are another commodity that will likely pinch household budgets. In a separate report released on April 05, Crisil projected a 20% rise in palm oil prices in India in coming months. Palm oil is India’s most consumed edible oil, followed distantly by soybean and mustard oils.

The country imports nearly 70% of all the edible oil it uses, according to Crisil, and a price rise in this segment can largely be attributed to government policies. “A series of (import) duty hikes on edible oils since August 2017 (to support prices and crushing of domestic oilseeds) and a sharper increase in import duty for refined palm oil will make palm oil more expensive in India,” Crisil said.

Meanwhile, Crisil also expects the rupee to depreciate in coming months, worsening matters for households by fueling the price rise. For countless Indians, the summer of 2018 is unlikely to be the best days of their lives.