Economic Highlights  

New Delhi, 24 September 2018

                                                              Soaring Oil Prices 

                                                     RATIONAL RATES POSSIBLE

       By Shivaji Sarkar

Oil prices have put the economy on flames. Rising inflation may not reflect in statistics, but it is impacting prices of commodities and is at the centre of debate and discussion.

The urban voters are judging the Government’s policies on the basis of rising market prices and petrol, particularly diesel, considered the villain. There is no denying it is affecting the urban plate. What about rural voters, are they not concerned? They definitely are as both farm input and output costs have increased. And though the rural voters are often less vocal, speak in nuances, they do act firmly.

So would it become a hot political issue? Possibly, but the people are confused whether taxing fuel is prudent or if there is an alternative or not. The Modi Government says it is losing revenue. But this is again debatable because of GST and has to be made up by continuous and multiple taxing of fuels.

In fact, fuel taxing has many dimensions; including raising “cess” for the highways, expressways and rural road construction. This turns out to be Rs 8 per litre against the previous Rs 2 per litre. It raises collection annually from around Rs 33000 crore to Rs 1.13 lakh crore a year. (This is in addition to other taxes collected, which were at Rs 88,600 crore in 2013-14).

The argument in the Union Budget was that since excise collections would be lost due to GST, petro products be additionally taxed. It is difficult to say whether this makes good economic sense. In fact, regimes that put high taxes suffer in popularity and affect the well-being of the society.

Officially, every government remains stoic on inflation. It is even argued to be a common phenomenon, but it forgets that any banker or economist considers inflation as undesirable as it hits the government the most, being the largest consumer. And inflation does make budgetary projections go awry.

Governments often at such moments make stringent rules. These profess that to counter the exigencies, the people must cope up with difficulties and simply put be prepared to pay higher taxes to rescue the government -- “a duty of the citizens”. And thus, various tax, law and order machineries become oppressive. This only adds to corrupt practices in the society and it is no secret that rates of various agencies have increased manifold and vasoolis are widespread.

According to the Union Finance Ministry, the Government expects to mop up over 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.

What needs attention is that at a time when the international prices for crude remain around $80 a barrel, the prices have crossed the limits when it was around $120 per barrel four years back. The reasons obviously are higher taxes and cess.

A Crisil research says that owing to the falling value of rupee and expecting oil to stabilise around $70, the import bill will be about Rs 6.5 lakh more in 2019, about 26 per cent higher. Does this mean the Government is in trouble? Yes. It has to mop up far more money. At the same time, it is saddled with the issue of the US sanctions on Iran. This means India have to look for about 12 per cent of its import from elsewhere.

New Delhi is trying to settle it with Iran through rupee payments. The sanctions, Indian government circles agree, are irrational and are left wondering why India’s supposedly better relations with the US are not coming to its aid. Perhaps, a shift in global policy may be an imminent need, but it would take time as Russia is also being similarly tormented through sanctions.

Additionally, it may be observed that the Indian currency has become a difficult performer since the world has become unipolar. Taking the rupee to its actual and desired level is being manipulated by international players. And, 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, and the sixth largest economy, needs to look at this aspect.

In the immediate context, the Government should bring down the 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 and adds to farm distress. Ultimately it is a tax on the country’s growth.

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, Crisil study says.

However, there is a window, which the Government can use. The price of domestic oil production is linked to international prices. While that can make some sense, it is a skewed policy. The production cost of Indian crude is far less than international prices. But production is falling for the past seven years -- it has slumped to 32 million metric tonnes in July 2018 from 38.1 million metric tonnes in 2011-12.

The average cost of production is around $40 a barrel, almost half of the international prices. But ONGC and other oil companies make phenomenal profit selling it at international prices. This is unethical. Should they be allowed to do so?

India imports 195.7 million tonne crude. Approximately, domestic production is 20 per cent. The oil companies can create a new Indian price by putting the Indian crude price at about $2 more than production cost, i.e. at $42 per barrel. This could reduce the actual oil price of the entire imports by about 20 per cent.

But this needs to be also backed with a cut in taxes. If this methodology, with some minor differences could be adopted, it could be a great lubricant for the economy. Immediately without a loss, petrol prices can come down to around Rs 60 a litre.

Unfortunately, this is not happening because somehow the buzz word in Indian commerce is high profits. All oil companies are rolling in profits though the country is reeling under high petro prices. The PSUs are supposed to make reasonable, that does not mean high, profit so that the people -- the real investors -- also benefit. On the contrary is happening and bleeding the people and economy.

Remember, lower oil prices had dramatically improved India’s terms of trade in 2015-16, thus boosting India’s gross domestic product (GDP). The country needs a rational policy to reset the prices. If it is done, politics would also change for the better.---INFA

(Copyright, India News & Feature Alliance)