The Hindu Business Line : Oil price hike and inflation — Cushioning the impact of a double-whammy

INFLATION is indubitably the cruellest form of taxation as it hits a large number of people, especially in a country of continental size like India, where the number of workers in the unorganised sector is legion.

The plight of the people who live on past earnings or retirement benefits based on interest income is even more pathetic.

With interest income dwindling and adding to the savers' woes in the wake of the steady decline in interest rates, the recent spurt in the inflation rate has come as a double whammy, as it has seen an upsurge in the prices of even essential items.

As the abrupt uptrend in the wholesale price index (WPI) after the Budget 2004-05 was presented on July 8 was ascribed to the rise in international crude prices, the Finance Minister, Mr P. Chidambaram, agreed to a cut in the Customs and excise duties on petroleum products, which was effected on August 18, entailing a revenue loss of Rs 2,500 crore for the remaining part of the fiscal.

While the giving up of revenue by the Government through these duty cuts on petro products is quite laudable, with the underlying hope that the oil companies will not jack up the prices of products, the flip side is that consumption of petro products will only go up as the price band remains stagnant, to the comfort of guzzlers, unless the authorities ensure some viable conservation strategies.

This is no more urgent than now, when the country's oil import bill has shot up to a staggering $9.90 billion in the first four months of the fiscal, against $6.11 billion in the corresponding previous period, fuelled by a flare-up in the global crude oil prices. Portents point to the oil import bill touching a massive $13 billion for this fiscal if there is no let-up in crude price rise.

It was also admitted in Parliament by the Minister of Petroleum and Natural Gas, Mr Mani Shankar Aiyar, that as per provisional figures, the consumption of petroleum products during April-June revealed a growth of over 10 per cent over the corresponding period of 2003.

Hence, the two duty cuts on petroleum products, instead of moderating any price rise, would have the unintended outcome of boosting consumption further as the consumers would be emboldened to splurge on in the wake of insulation from international crude price trends.

A little recall of recent past events is in order. It is not that the United Progressive Alliance (UPA) Government rushed to the rescue of consumers by sacrificing a chunk of revenue on this score, concerned over the relatively high inflation rate.

It is also disquieting to note that the yearly rate of inflation, on point-to-point basis, stood at 7.96 per cent (provisional) for the week ended August 7, 2004.

Though fuel, power, light and lubricants constitute around 14 per cent of weight in the WPI, the impact of increase in energy prices works both directly and indirectly on a wide range of economic agents, driving up the cost of production.

Till June 15, Central excise on petro-products was levied at a whopping 30 per cent plus Rs 7.50 per litre. In the case of diesel the rate of excise was 14 per cent plus Rs 1.50 per litre.

It was only on June 16, soon after it assumed office, that the Government effected a reduction in the ad valorem excise duty rates on petrol from 30 per cent to 26 per cent, on diesel from 14 per cent to 11 per cent and on LPG from 16 per cent to 8 per cent so that the oil marketing companies (OMCs) did not try to jack up the consumer prices of these products. This cost the exchequer revenue of Rs 2,938 crore that would have come in over the remaining part of the fiscal year.

The idea is that if the full impact of high global oil prices was passed entirely on to the consumer, it would have meant too much burden on them.

In this way, the Government as also the OMCs must perforce come to the conclusion that the consumers ought to be spared the burden.

The mid-June moderation in excise duty cuts, close on the heels of the new Government assuming charge, could work only for a month or thereabouts as the WPI-based inflation zoomed to a three-and-a-half year high of 7.51 per cent for the week ended July 24, riding on a host of rising vegetables, minerals and manufactured product prices, for all of which energy input cost is substantial.

Though Mr Chidambaram promised a "measured" approach, both on the fiscal and the monetary front to tame "the demon of inflation", the international crude oil scenario in the meanwhile has gone from bad to worse, threatening to touch $50 per barrel of crude. Oil prices touched a record high of $42 per barrel in the first week of June, a traumatic spurt to import-dependent countries such as India.

India imports well nigh 70 per cent of its crude requirements, with last year's import being estimated at 91 million tonnes from 81 million tonnes in 2002-03.

The Government, faced with critical choices between high inflation and lower tax yield from petroleum products, opted for the latter for the second time in exactly two months.

It announced both Customs and excise duty cuts covering petrol, diesel, kerosene (for public distribution system) and LPG in the case of Customs and petrol, diesel and kerosene (for PDS) for excise on August 18.

Thus, the Finance Ministry has in two months time given up revenue of the order of Rs 5,438 crore by way of an expensive lunch to the demon of inflation, regardless of the consequences of such losses to the exchequer.

One can argue that the high prices of international crude should not confer any unearned benefit accruing to the coffers of the Government even with the existing quantum of imports.

But this is no reason why the Government should fail to explore other ways of cushioning the harsh impact of rise in imported energy prices, in particular, by promoting a slew of energy conservation measures.

Considering the fact that India's dependence on oil imports is more than substantial, the time has come to ensure that the country benefits from national oil companies' overseas exploration in Vietnam, Russia (Sakhalin), Angola, Iran, Iraq, Syria, Libya and Sudan through productive production-sharing for long-term benefit in the face of relentless rise in global crude prices.

If the country could ensure a steady flow of crude from these overseas sources, the Government would be justified in effecting duty cuts on petroleum products periodically.

But this is still no comfort and could be construed only as a perfunctory policy to alter the duty structure without really changing the basis of taxation from ad valorem to specific duties.

Besides, conscious efforts need to be made to bring in a specific duty rate structure and lower rate of duty in place of the plethora of levies being charged on petroleum products, such as basic Customs duty, additional Customs duty (countervailing duty), National Calamity Contingent Duty, Education Cess on the Customs side and basic excise duty, special excise duty, additional excise duty, special additional excise duty NCCD and education cess on the excise, making a mockery of the much-needed intention to move towards an internationally efficient tax system.

Till a beginning is made in this direction, the Indian consumer of energy products continues to be taken for a ride by the authorities.