How does India deal with the issue? It may be wise to remember that all three previous oil price surges led to political and/or economic crises, in 1973-75, 1979-80 and 1990-91. A crisis this time round can be prevented only with focused action. For starters, it should be obvious that we cannot have more of the same "" ie virtually fixed retail prices for petroleum products, and a ballooning subsidy bill "" because that will mean the end of all fiscal correction. The average import price so far this year is about twice as high as it was three years ago ($106, against $56). The net import bill has already climbed in two years from $38 billion to $64 billion; if prices stay at current levels, this year could see the bill balloon by another $20 billion, at which point the net oil import bill would eat up roughly half the dollars earned from goods exports. Any further price increases would be on top of that. It seems possible therefore that the current account deficit will climb to the unprecedented level of 3 per cent of GDP "" a situation that could put downward pressure on the rupee, and slow down if not reverse the accumulation of foreign exchange reserves. If India slips into a large twin-deficit problem, then the only solution will be to slow down growth by curbing demand.
Yet, the consumer feels none of the pressure from this extraordinary situation "" and will probably stay insulated because the government is already battling inflation in a pre-election year and is in no mood to take anything resembling a harsh measure. The result is that there are no price signals being conveyed that will squeeze consumption on the margin, or facilitate the search for alternatives. Additional domestic supply could give some relief, but it remains unclear as to when the privately developed oilfields will start delivering significant output.