IN­DIA’S OIL CRI­SIS

THE RE­LENT­LESS RISE IN CRUDE OIL PRICES IS PROV­ING TO BE AN IN­TRACTABLE FIS­CAL AND PO­LIT­I­CAL PROB­LEM.

Business Today - - CONTENTS - By ANILESH S. MA­HA­JAN @anileshma­ha­jan

The re­lent­less rise in crude oil prices is prov­ing to be an in­tractable fis­cal and po­lit­i­cal prob­lem

AS THE NDA REGIME en­ters the last year, the gov­ern­ment is in a tizzy over high petroleum prod­uct prices. The cri­sis is big­ger in In­dia since these prod­ucts are heav­ily taxed. As a re­sult, the gov­ern­ment is run­ning out of op­tions. For the BJP, high fuel prices are be­com­ing coun­ter­pro­duc­tive. There are two solutions: a) Re­duce taxes on these prod­ucts or b) Ask oil com­pa­nies to of­fer dis­counts. The sec­ond will undo the work done in the last four years to clean up the books of oil com­pa­nies by giv­ing them pric­ing free­dom.

A back-of-the-book cal­cu­la­tion sug­gests a ` 1 re­duc­tion in ex­cise duty would mean re­duced col­lec­tions of ` 13,000 crore. Also, ev­ery $10 rise in crude prices per bar­rel slows growth by 0.2-0.3 per­cent­age points and fu­els WPI in­fla­tion by 1.7 per­cent­age points. In­dia may need an ad­di­tional $30 bil­lion to buy last year’s quan­tity of crude.

One rea­son for high re­tail prices is high taxes. One way out is to bring petroleum un­der GST, but states will find it dif­fi­cult to ad­just to this. The fi­nance min­istry ex­pects to mop ` 2.57 lakh crore from petroleum this fis­cal and a sim­i­lar amount will go to states to fund 116 so­cial sec­tor schemes and on­go­ing in­fra­struc­ture pro­jects. This is a quar­ter of in­di­rect tax col­lec­tions and 40 per cent of states’ rev­enues. Even if states agree, the new ar­range­ment will take three­four months to sta­bilise.

Crude prices are on the boil be­cause of two rea­sons: a) The fear pre­mium, be­cause of the US sanc­tions on Iran and b) OPEC, along with Rus­sia, con­tin­u­ing with curbs on oil pro­duc­tion. With no op­tion but to cut taxes, In­dia is hop­ing that in­ter­na­tional prices come down. That seems dif­fi­cult for now.

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