The Hindu Business Line : Redistributing the oil burden

THE REDUCTION IN Customs and excise duties on petrol, diesel, kerosene and cooking gas, effected by the Government on Wednesday, welcome as it is, was also probably inevitable. The runaway rise in global oil prices, which has just crossed the $47 per barrel mark, and the compulsion to keep retail fuel prices under check to rein in inflation, forced the Government's hand. With the oil companies already sacrificing a part of their cash flows and profits by subsiding kerosene and cooking gas, and the consumer coughing up higher retail prices for petrol and diesel, the Government was the only stakeholder that did not bear part of the higher burden. The reduction in excise duties now ensures that it does that but the overall impact of the duty reductions is more on the oil companies, which are now called upon to sacrifice a part of their refining margins to keep retail prices under check.

The reduction in Customs duties on the four products will have only a minor impact on government revenues because there are practically no imports of petrol and diesel while imports of kerosene and cooking gas are minimal. Besides, the notional loss due to the minor reduction in excise duties will soon be made up if global prices continue their upward journey. On the other hand, the oil companies now stand to lose a good part of the price protection hitherto enjoyed by them, which will impact their refining margins directly. Admittedly, the refining companies enjoy rather fat margins now but that is exactly what has enabled them to bear the lion's share of the subsidy on kerosene and cooking gas. The question is whether it is right for the Government to weaken them financially and also expect them to continue with their investments in the sector unhindered.

The Government has cleverly left untouched the import duty on crude oil, as a reduction therein would have dented its revenues significantly. Yet the fact is that such a reduction would probably have done more to prevent a retail price increase in products than the measures taken now which may at best help avoid an increase in prices this fortnight. If the current global oil price trends sustain, the government may be faced with a price increase decision within the next fortnight. The reduction in import duty on kerosene and cooking gas to 5 per cent has also skewed the duty structure as crude oil suffers a 10 per cent duty. This anomaly may have to be rectified soon.

The reduced protection levels may also have no impact on investment plans in the refining sector because there is already an excess capacity for refining in the country and no major refinery project is likely to go on stream in the next four to five years at least. While the focus has been on what the Centre and the oil companies can do to help control retail prices, the role of the State governments has been ignored. The truth is that State government levies such as sales tax and octroi add a sizeable amount to the final retail price, especially in such States as Maharashtra and Tamil Nadu. Extraordinary situations call for extraordinary responses and it is time the State governments also did their bit to ease the burden on the consumers by pegging down State taxes.