42% Indian households to cut discretionary spending if petrol/diesel prices rise

February 26, 2022, New Delhi: Tragedy and despair have engulfed Ukraine as the President of Russia Vladimir Putin ordered a “special military operation” on Feb 24th, with people from around the world terming it as a war of aggression by the latter. This will likely have wide ramifications for India too in the form of price surges, especially in petrol and diesel rates as crude oil surpassed USD 100 per barrel on the same day following Russia’s invasion.

The rise in fuel price has had an adverse impact on how citizens commute, how much essentials and other goods cost, and how people draw up their personal finance. Prices of petrol and diesel in India witnessed a record high in 2021. The prices of petrol in India hovered between INR 100-110 a litre in most cities and diesel between INR 90-100 for almost 12 months. Citizens were given some relief when the Union Government reduced excise duty on petrol and diesel followed by many State Governments reducing the value-added tax (VAT). Currently, the price of petrol in most parts of India is between INR 100-105 per litre and the price of diesel is between INR 90-95 per litre. India’s Budget for 2022-23 had estimated an average of USD 75 per barrel. With prices of petrol and diesel frozen in India due to 5 state elections, analyst estimate a price increase of atleast INR 10 per litre post March 8th, once polling in all states is complete. The situation in Ukraine is also likely to lead to an increase in the subsidy on LPG and kerosene and either Government absorbing it or passing it on to the people.

With the two COVID waves impacting people’s lives in India in the last 12 months, LocalCircles via its latest survey attempted to understand where they stand with their household earnings and savings and how much of a price increase can households absorb given the rise in crude prices and the Ukraine – Russia impact. The survey received over 27,000 responses from citizens located in over 361 districts of the country. 66% respondents were men while 34% respondents were women. 42% respondents were from tier 1, 34% from tier 2 and 24% respondents were from tier 3, 4 and rural districts.

1 in 2 households believe their earnings will dip in 2022; 35% say they will stay the same while 4% see them rising

The first question in the survey asked households, “Given COVID pandemic, the geopolitical situation and the state of your organisation/business/employment, how do you see on your household earnings in 2022?” In response, only 4% of households said, “Will increase by 25% or more”. There were, however, 6% who said “Will reduce by 50% or more” and another 6% said “Will reduce by 25-50%”. Breaking down the poll, 19% said “Will reduce by 0-25%”, 22% said “Will reduce but can’t say how much right now”, and 35% said “No impact” while 8% did not have an opinion. On an aggregate basis, 1 in 2 households believe their earnings will dip in 2022. This question in the survey received 8,654 responses.

1 in 2 households believe their savings will dip in 2022; only 11% households believe it will increase

The next question in the survey asked households, “Given COVID pandemic, the geopolitical situation and the state of your organisation/business/employment, how do you see on your household savings in 2022?” In response, only 6% of households said, “Will increase by “25% or more” and another 6% said “Will increase by 0-25%”, 3% said “Will increase by 25% or more” and 2% said “Will increase but can’t say by how much”. There were also 6% of households who said “Will reduce by 50% or more”, 8% said “Will reduce by 25-50%” and 17% said “Will reduce by 0-25%”. 19% of households said “Will reduce but can’t say how much right now” and 35% said “No impact” while 4% did not have an opinion. On an aggregate basis, 1 in 2 households believe their savings will dip in 2022, while only 11% of households believe it will increase. This question in the survey received 9,326 responses.

42% Indian households say can’t tolerate another increase in petrol/diesel prices; 24% already have cut discretionary spending and on the edge

Petrol and diesel prices have not been revised since the Union Government of India reduced excise duty on the two fuels on November 3, 2021 and State Governments lowered VAT thereafter. However, due to rise in crude oil prices and the Russian-Ukraine situation, the survey asked households how much of an increase can they tolerate if petrol and diesel prices have to be increased without them having to cut discretionary spending. In response, only 22% of households said they “Can tolerate any increase in the short term”, 9% said “Up to 20%” and 7% said “Up to 10%” and 16% said “Up to 5%”. 24% of households said they are “Already cutting discretionary spending and will continue to cut further” and 4% did not have an opinion. On an aggregate basis, 42% of Indian households said they can’t tolerate another increase in petrol/diesel prices and will cut discretionary spending; of whom 24% have already cut some discretionary spending. This question in the survey received 9,834 responses.

In summary, the findings of the LocalCircles survey indicate that 1 in 2 Indian households expect earnings and savings to decrease in 2022 because of multiple reasons like the impact of past COVID waves, future pandemic related uncertainty and now the projected inflationary impact likely due to rising prices of oil and other related commodities. When asked about their tolerance to likely increase in petrol, diesel prices in the short term, 42% Indian households cannot tolerate an increase in petrol or diesel prices and will have to cut discretionary spending to cope with it. The Government will have a choice to make soon to absorb the impact of crude oil price increase by lowering duties and taxes so consumer price at pump remains the same and continue the economic momentum or increase prices of petrol and diesel, maintain fiscal deficit and be ready to take the hit on spending and economic growth.