The economic slowdown induced by Covid-19 and the accompanying relentless surge in fuel prices have forced many Indian households to alter their spending patterns to salvage their monthly budgets.
A report by the country’s largest lender, State Bank of India, says that the rise in gasoline and diesel spending is forcing consumers to cut corners, even on health expenditures. The cutbacks on grocery and utility services are so substantial that the demand for such products has significantly declined, Business Standard reports.
The share of non-discretionary spending, on items including fuel, according to State Bank’s estimates, jumped to 75% in June from 62% in March.
On the other hand, most households across the country are grappling with higher medical expenses due to the Covid pandemic and rising commodity prices. Either they have curtailed their spending or they’ve had to dip into their savings to meet expenses.
Earlier a report by the Reserve Bank of India stated that the household financial savings rate in the December 2020 quarter (Q3-FY21) had come down to 8.2% of gross domestic product from 21% and 10.4% in the previous two quarters.
There are also reports that the pandemic is forcing many Indians to sell gold to tide over financial woes. In rural India, where banking services are scarce, people are selling gold as the second wave of Covid-19 has affected their incomes and medical expenses have soared.
Banks and shadow bankers are facing a rise in gold loan defaults, as many borrowers are finding it difficult to repay the money. To avail oneself of such a loan, a borrower has to pledge gold as collateral for the period of the loan. Banks charge an interest rate and, once the loan is repaid, they return the gold.
Prominent gold loan provider Manappuram Finance in the last three months auctioned 4.04 billion rupees’ ($54 million) worth of gold left over from loans that turned sour. Prior to that, the company had auctioned only 80 million rupees’ worth of gold in nine months.
The rise in global crude prices coupled with the high domestic taxes took a toll on fuel prices. In many parts of the country, gasoline is now sold at over 100 rupees a liter, and diesel prices are not far behind.
The federal and state governments have maintained high tax rates on fuel in order to offset the fall in revenues from other sources due to the pandemic. Even when crude oil prices crashed last year during the early days of the Covid-19 pandemic, fuel prices in India remained high.
On the other hand, the rising fuel prices have cast a long shadow on inflation, as diesel is used extensively by transport operators and farmers. Retail inflation in May (6.30%) and June (6.26%) remained above the Reserve Bank of India’s upper margin of 6%. The central bank has been tasked with maintaining retail inflation at 4% with a margin of 2% on either side till March 2026.