Start praying for stable crude

Duty cuts use up ammunition too soon

The government has done what it eventually had to do in an election year: cut duties on petrol and diesel and ask state-owned oil marketing companies to reduce their margins by ~1 per litre, to cumulatively reduce the price of diesel and petrol by ~2.50 per litre, at the level of pricing determined before state taxes are added on. The government has asked state governments, too, to chip in and bring down fuel prices by another ~2.50 per litre. This makes eminent political sense ahead of crucial assembly elections coming up in Madhya Pradesh, Rajasthan, Chhattisgarh and Mizoram. But it might not, if crude prices continue to climb and the rupee continues to fall, thanks to multiple pressures.

When the rupee depreciates and the global price of crude goes up, the import bill of oil goes up. Revenues go up, of course, but so do subsidies on cooking gas and kerosene. One estimate has the subsidy bill ballooning to three times the original estimate for the year, to over ~60,000 crore. The government claims that it has given away only ~10,500 crore through the present duty cuts. But, along with the ballooning of the subsidy bill, the additional demand on the fisc comes to ~50,000 crore and more. As elections come nearer, the government might feel like loosening its purse strings yet more, as in the case of the liberal support prices for farm products announced recently. If it still has to stick to the fiscal deficit target, it would have to cut back on capital investment. The Economic Times, October 5