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Uneven burden sharing

The decision to hike the retail prices of petrol and diesel by Rs.2 and Re.1 a litre respectively comes after six months of deliberations. The prices of cooking fuels — LPG and kerosene — have been left untouched. The last revision in the prices of transportation fuels was in June 2006. At that time the average price of the Indian crude basket was $67 a barrel, while the average for this year so far is $76.43. More ominously, global oil prices appear to have se ttled at even higher levels in the recent past. After touching $100 a barrel in January, oil prices have eased marginally but still trade at around $93. Global geopolitical factors, notably the prolonged strife in the oil producing regions of Nigeria, do not augur well for uninterrupted supplies. From the outcome of its two recent meetings, the OPEC appears to be comfortable with the current prices. For the government, therefore, there are really no options except to apportion the additional burden among the three parties directly affected — the consumer, the oil marketing companies, and the exchequer, both at the Centre and in the States. Any decision on oil prices is therefore a compromise, unlikely to satisfy anyone. This time while consumers will pay more, the government oil marketing companies expect to pare down their losses on retail trade by about Rs.850 crore over the rest of the year. A substantial portion of their “under recoveries” — roughly the difference between the cost of production and selling price — will be met through the additional issue of bonds. Oil bonds will be used to fund 57 per cent of the oil companies’ losses, up from the present level of 47 per cent.

For now, the government has not given any tax concessions that could cushion the impact of the retail price hike. The petroleum sector contributes nearly Rs.93,802 crore by way of indirect taxes to the Centre and Rs.62,121 crore to the States. The forthcoming budget is expected to give some clues, although it is unlikely that the government will be able to forgo substantial tax revenues, given its high level of expenditure. Still the Centre could have demonstrated its commitment to not casting too heavy a burden on the people by announcing some nominal tax cuts on petroleum products and by asking the States also to match that gesture. Inflation, always lurking around the corner, is likely to become more potent as transportation costs go up. Being an off-budget item, the bond route is open to criticism on many counts. It lends considerable opacity to public financial statements besides shifting the burden of redemption to a future government. Like the new pricing formula, the methodology of implementing it will remain mired in controversy.

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