Policy Reset Needed to Curb Fuel Prices

High oil prices have put the Indian economy on flames. Rising inflation, though not reflective in statistics, is impacting the price of commodities. Urban voters are judging the Government’s...

High oil prices have put the Indian economy on flames. Rising inflation, though not reflective in statistics, is impacting the price of commodities. Urban voters are judging the Government’s policies on the basis of rising market prices and petrol, particularly diesel, and are considering themselves the victims. Are rural voters not concerned? They are. Farm input and output costs have increased. Rural voters are often less vocal. So will this become a political issue? Possibly it will. But people are confused whether the Government’s taxing of fuel is prudent or whether it has an alternative. The Government is of the view that it is losing revenue. This is debatable because of the inclusion of the GST, and it has to be made up by continuous and multiple taxing of fuels. In fact, fuel taxing has many dimensions, including raising ‘cess’ for highways, expressways and rural road construction. Road cess is eight rupees per litre as against the previous two rupees per litre. This has raised the annual collection from around Rs 33,000 crore to Rs 1.13 lakh crore a year. (This is in addition to other taxes collected that was at Rs 88,600 crore in 2013-14).

The argument in this year’s Budget was that since excise collections would be lost due to GST, petro-products must be additionally taxed. It is difficult to say whether it is good economics or not. In fact, regimes that put high taxes suffer in popularity and affect the well-being of society. Officially, every Government remains stoic on inflation. It is even argued to be a common phenomenon. But it forgets the fact that any banker or economist considers inflation as undesirable as it hits the Government the most. Inflation makes budgetary projections awry. At such points, Governments often make stringent rules. It professes that to counter exigencies, people must cope up with difficulties they should be prepared to pay higher taxes to rescue the Government. Various tax and law and order machineries become oppressive. This adds to corrupt practices in the society. According to the Finance Ministry, the Government expects to mop up more than Rs 2.579 lakh crore by levying taxes on petroleum products by the end of this fiscal. This is a massive jump. In the last fiscal, the collection was Rs 2.016 lakh crore. These collections stabilised the fluctuating GST collections in the indirect tax kitty. Now when international prices remain at around $80 per barrel, prices have crossed limits when it was around $20 per barrel, four years back. Reasons are definitely higher taxes and cess. A Crisil research said that owing to the falling value of the rupee, which has made buying of oil from overseas costlier, India’s import bill is likely to surge to $26 billion more in 2019. This means trouble for the Government. It has to mop up far more money. As it is, it is saddled with the issue of the US sanctions on Iran. This means India has to look for about 12 per cent of its import from elsewhere.

A shift in policy, globally is needed. It may take time as Russia is also similarly being tormented through sanctions. It has been observed that the Indian currency has become a difficult performer since the world became unipolar. It is strange that many countries, smaller than the size of the smallest Indian State, have ‘stronger’ currencies. India, now over a two trillion-dollar economy, needs to look into this aspect. In the immediate context, the Government should bring down prices by rational pricing. Fuel should not be taxed heavily. Despite growth, it is a fledgling economy and high taxes apart from adding to the costs also create distances as it affects travel, transport and production. It makes even food grain production uneconomic, adding to farm distress. Ultimately, it is a tax on the country’s growth.

Crisil study also says that excise duties have risen significantly since 2013-14, accounting for 22 to 25 per cent of the retail prices of petrol and diesel respectively, compared with 12 to 15 per cent earlier. There is a window and the Government can use it. The price of domestic oil production is linked to international prices. While that can have some sense, it is a skewed policy. The production cost of Indian crude is far less than international prices but production has been falling in the last seven years. It has slumped to 32 million metric tons in July 2018 from 38.1 million metric tons in 2011-12. The average cost of production is around $40 a barrel, almost half of the international prices. But the Oil and Natural Gas Corporation and other oil companies make phenomenal profit selling it at international prices, which is unethical.

India imports 195.7-million-ton crude. Approximately, domestic production is 20 per cent. The oil companies can create a new Indian price by putting Indian crude price at about two dollars more than production cost, that is at $42 per barrel. This could reduce the actual oil price of the entire imports by about 20 per cent. But this has to be backed up by cut in taxes. If this methodology with some minor changes could be adopted, it would be a great lubricant for the economy. Immediately without a loss, prices of petrol can come down to around Rs 60 a litre. It is not happening because somehow the budge word in Indian commerce is high profits. All oil companies are rolling in profits though the country is reeling under high petro prices. India needs rational policy to reset the prices. If it is done, the politics would also change for the better.

Policy reset needed to curb fuel prices – All oil companies are rolling in profits though the country is reeling under high fuel prices. This calls for a much-needed shift in policy, globally For more information visit: https://www.dailypioneer.com/

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