Rising fuel prices eating into non-discretionary, health spends: SBI report

The steady rise in auto fuel (petrol and diesel) prices has not only fanned inflation concerns over the past few months, but has also altered spending patterns of consumers. A recent report by the economic wing of State Bank of India (SBI) suggests that as consumers are spending more on fuel, it is crowding out expenses on health.

“Our analysis of SBI card spends indicates that spend on non-discretionary health expenditure has been substantially reduced to accommodate increased expenditure on fuel. In fact such spending has more than crowded out the spending on other non-discretionary items, like grocery and utility services to such an extent that the demand for such products has significantly declined,” wrote Dr. Soumya Kanti Ghosh, group chief economic adviser at SBI in a July 13 note.

The share of non-discretionary spend on items like fuel, according to SBI’s estimates, jumped to 75 per cent in June 2021 from 62 per cent in March 2021. In April - May 2020, the non-discretionary share had reached 84 per cent, data show.

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The dent due to rising petrol and diesel prices comes at a time when most households across the country are grappling with higher medical expenses due to the Covid pandemic and rising commodity prices that is sending their monthly budget haywire. As a result, households have either curtailed their savings or had to dip into their savings to meet expenses.

According to preliminary estimates by the Reserve Bank of India (RBI), the household financial savings rate in the December 2020 quarter (Q3-FY21) has come down to 8.2 per cent of gross domestic product (GDP) from 21.0 per cent and 10.4 per cent in the previous two quarters.

For India, the rising crude oil prices have led to challenges for the Government as it tries to balance the need for extra revenue from high excise duties with rising fuel inflation and its impact on overall inflation. 

In the past one year, Brent crude oil prices have jumped over 76 per cent to $75.35 a barrel now. The Indian crude oil basket has jumped nearly 32 per cent thus far in 2021 to $71.63 a barrel now. Over the past few weeks, petrol prices have breached the Rs 100 per liter mark in several cities across the country. 

Fueling inflation

With every 10 per cent increase in petrol pump prices (Mumbai), SBI estimates that there is a 50 basis point (bps) increase in consumer price inflation (CPI).

 

“Inflation in fuel components rose by 12.7 per cent in June’21 over the 0.5 per cent growth in June’20. The rise in global energy prices coupled with the high domestic taxes has been pushing fuel prices upwards. Higher fuel prices have led to an increase in transportation cost that is getting embedded across segments,” said Madan Sabnavis, chief economist at CARE Ratings.

Going ahead, most analysts expect inflation to remain elevated led by rising fuel prices and firm commodity prices. Those at Nomura, for instance, expect headline inflation to average around 6 - 6.3 per cent in Q3 2021 (July – September) – higher than the RBI's upper comfort limit of 6 per cent – followed by a moderation to around 5.2-5.5 per cent in Q4 (October – December) due to base effects, before rising again to 6.2-6.5 per cent in Q1-2022 (January – March).