The first impact of the rupee crisis will be felt on you when the diesel price is hiked by the government soon. There will not be much gestation period for the price hike; otherwise governments’ finances will be in disarray because of the higher subsidy bill.
How much costlier will be diesel in the coming months? The answer depends on many factors including the readiness of the government to take a political risk in the wake of the nearing general elections.
Diesel price should be increased by at least 24 per cent to compensate the burden of the depreciated rupee. This means an increase of nearly Rs 13 per liter. The lesser the price hike, the greater will be the subsidy burden for the government.
Here, the government may definitely balance political and economic considerations while choosing a decision.
The present financial condition of the government is going from bad to worse. Already government borrowing represented by fiscal deficit is very high and the Food Security Act will increase the subsidy burden. There is every chance that the currency’s crisis may produce a fiscal crisis. Financially, there is little space for the government to absorb the cost of diesel subsidy.
Thus the chance is that the government may pass on major portion of the diesel cost escalation to the consumers. There is every chance that diesel may become costlier by at least 10 rupees in the coming months. In such a scenario, inflation may make a strong double digit return.