Will changing from fuel based vehicles to electronic vehicles have an impact on inflation?
An idea explored with Dr. Niranjan Rajadhyaksha
- What is the relationship between oil prices and inflation from Indian economy perspective?
Indian inflation is sensitive to global oil prices. There are two effects to consider. First, there is the direct effect. Fuel has a weightage of around 7 percent in the Indian consumer price index, so a change in fuel prices goes directly into the CPI. Second, there are indirect effects. Higher fuel prices push up the costs of transportation, petroleum products, fertilizers etc. These in turn lead to higher prices of other goods, including food.
- RBI Governor Shaktikanta Das on 8th April 2022 said that the inflation rate is expected to rise from 4.5 per cent to 5.7 per cent in 2022-23 due to the average crude oil price that is $110 per barrel. What are your views on this?
I agree with the RBI decision to increase their inflation forecast. There was a feeling in the last few months of 2021 that inflation pressure will ease as pandemic-related restrictions ease. The winter crop was also good. However, the Ukraine war has dealt another blow to the global economy. Also, inflation has now become widespread rather than being restricted to a few commodities. With the benefit of hindsight, it is clear that the RBI underestimated inflation pressures last year. It is good that they have now made the necessary correction in their forecast.
- In January 2022, the total two-wheeler sales dipped 16.09 per cent YoY. In January 2022, sales stood at 14,41,184 units, down from 17,17,621 units sold in January last year. The four-wheeler sales in India were 2,62,984 units in February 2022 as opposed to 2,81,380 units in February 2021, marking a 6.53 per cent sales decline. Do you think higher oil prices can be one of the reasons for drop in the sales?
There is definitely a link between fuel prices and automobile sales, since running costs is one of the factors that goes into the decision to buy a car or two-wheeler. But there have been other factors at play as well. Low interest boost automobile sales, but there are other variables that are likely to have hurt sales. The income of Indians – especially the class that buys two-wheelers – has taken a hit because of the pandemic. There is also the global semiconductor shortage to consider, which means that automobile companies have been forced to restrict production.
- Are we ready and is it viable to shift from fuel based or oil and petroleum using vehicles to Electric Vehicles (EVs)?
I think the shift has already begun, thought it will be a slow process. I am not an expert on technology, but my reading suggests that the new EV technologies have not yet been firmly established. The recent fires in some EV scooters is a case in point. The transition has to be managed carefully. Also, it is important to understand the impact of EV sales on the consumption of fossil fuels, be it petroleum, diesel or coal. If the electricity that is used to power an EV is still being produced by traditional power plants, then all that EVs will do is to shift pollution from the cities to the areas where the power plants are located. So, it is important to calculate the carbon footprint of EVs in what economists would call a general equilibrium framework.
- What kind of impact this shift and changing our consumption to become greener will have on prices of oil and petroleum products? Can it be a case of cross price elasticity of demand?
If the use of EVs eventually leads to lower usage of fossil fuels, then it is almost sure that the prices of oil and petroleum products will be impacted, either as an absolute fall or a change in relative prices.
- Will it reduce the oil prices led inflation in India? If yes, then what changes will reduction in oil prices bring to the Indian economy?
The oil intensity of the Indian economy, and indeed most major economies, has anyway been coming down in recent decades. This means that we now need less oil than before to produce one unit of GDP. A large shift away from fossil fuels such as oil will reduce the sensitivity of Indian inflation to global oil prices. For now, the usual thumb rule I use is that a $10 increase in global oil prices leads to a 0.5 percentage point increase in Indian inflation, and a 0.4 percentage point increase in the current account deficit, which is the widest measure of our trade with the rest of the world. In general, India is a commodity importer, so lower oil prices will benefit the economy.
- To boost manufacturing of EVs, the Government of India has initiated Advanced Chemistry Cell (ACC) under the Production-Linked Incentive (PLI) scheme. The surge in demand of EVs if happens will it lead to changes prices of other related goods or the raw materials? And, how can we manage EVs led inflation?
It is too early to say this, since the EV industry has not yet achieved scale, but it is worth pointing out that the current generation of EV batteries use certain inputs such as lithium and cobalt that are themselves in short supply, and concentrated in a few countries.
- Before complete implementation, are there any factors that we should consider and study from the incidences of oil prices led inflation so that price stability in the economy can be maintained?
A lot really depends on the source of the inflation pressure. It could either come from excess demand or a supply squeeze. It could either come from the government or the private sector. It can come from domestic imbalances or from imported inflation. Each situation will demand a different policy response, in terms of fiscal policy, monetary policy, exchange rate policy as well as supply management. What is important is that inflation should not be taken lightly, because it increased economic uncertainty one the one hand hurts the poor on the other hand. So there are consequences for both economic efficiency and economic justice.
- Can the economy completely and ever get rid of inflation caused by oil prices?
Only if oil consumption drops to zero, which seems unlikely right now. But the shift to a truly green economy can reduce the impact of oil inflation on the general economy for sure.
*The views/opinions expressed in the above article exclusively belong to the writer. Tatvita may have different opinions on the subject.*
About the Expert
Dr. Niranjan Rajadhyaksha is an economist and writer. He is CEO and Senior Fellow at Artha India Research Advisors. He was earlier Research Director at IDFC Institute and Executive Editor of Mint, where he continues to write his Cafe Economics column. Connect with him on Twitter.
Twitter handle: @CafeEconomics
Knowledge-sharing platform is aimed at providing analytical insights into Economy, Public Policy and Foreign Policy.
2 thoughts on “Will changing from fuel based vehicles to electronic vehicles have an impact on inflation?”
What a thrilling post, you have pointed out some excellent points, I as well believe this is a superb website. I have planned to visit it again and again.
Hi there! Nice material, do keep me posted when you post something like this again! I will visit this blog leaps and bounds for more quality posts like it. Thanks… Putlocker