The Hindu Business Line : Dearer fuel

The policy of making upstream oil producers part with some of their profits and the Government absorbing the balance of the deficit through tax cuts and non-cash grants to oil companies cannot be faulted.

With only days remaining for the presentation of the Union Budget the Government could clearly no longer duck the question of a hike in petroleum product prices. Until now it had run through the whole gamut of political devices available to avoid taking a call on the price hike, hoping, perhaps, that the crude price rise would be a temporary phenomenon and, hence, the need to recalibrate end product prices would simply disappear. But when crude prices showed no signs of so ftening and prices, if anything, have only tended to harden further, the Centre resorted to the time-tested device, used whenever confronted with any sensitive political question, of setting up an Empowered Group of Ministers to go into the question. When even this proved of little avail, it had to invoke the authority of the Cabinet Committee on Political Affairs to come up with a marginal upward adjustment in prices of petrol (Rs 2 per litre) and diesel (one rupee per litre). The modest increase and the avoiding of hikes in kerosene and LPG prices should help the Government ride out any political storm that may be whipped up.

Most countries find a decision on fuel price hike in response to signals on input costs politically challenging. India, with more than its fair share of the poor, who are vulnerable to any sudden spikes in fuel prices, is no exception. Some kind of subsidy mechanism, with all its faults, becomes unavoidable. Secondly, the model chosen by India — namely, making upstream oil producers part with some of their gains (de facto windfall gains tax) and the Government absorbing the balance through a combination of tax rationalisation and non-cash (oil bonds) grants to oil companies — cannot be faulted. But these have to be structured transparently. The present practice of regarding oil bonds as a non-cash transaction and one with no immediate fiscal impact is dangerous. It obscures the true picture of the Government’s internal debt situation. The Rs 70,000 crore that it currently owes to oil companies may for now be only a fraction (four per cent) of its total domestic indebtedness. But with international crude prices poised to remain at the existing level, if not rise further, the impact on the fiscal situation can only worsen, rendering the Government’s present action open to further criticism.

Petroleum product price increases typically cause the prices of most other goods to move higher, a prospect that could effectively dissuade the Reserve Bank of India from signalling any time soon a softer interest rate regime. However, should interest rates remain where they are, the differential between those in the West and in India could widen and trigger another surge of overseas funds in search of quick returns. These are challenging times for those in charge of managing the economy.

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