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Biting the petro bullet

After considerable hesitation, the government has announced a package of measures to cope with the heavy burden imposed by the high global oil prices. Its most visible component is the hike in the retail prices of petrol and diesel — by Rs.5 and Rs.3 a litre respectively — and domestic cooking gas, by Rs.50 a cylinder. The price of kerosene remains untouched. The price hikes will yield an additional Rs.21,100 crore to the oil marketing companies. In attempting to bridge the ceaselessly widening gap between oil prices ruling in international markets and the prices of petroleum products obtaining in the country, the government could not have gone for a stiffer mark-up, given the political compulsions of the day. To further compensate the public oil marketing companies from under-recoveries, which were estimated — before the latest price revision — to grow to Rs.250,000 crore this year, the government has announced some duty cuts and asked upstream oil companies to increase their share of subsidies to the marketing companies. The cuts in customs and excise duties are expected to cost the exchequer Rs.22,660 crore by way of revenues forgone, but that was both inevitable and widely expected. In fact, considering that the petroleum sector is the most heavily taxed, there were expectations that the size of duty reductions would be larger and that the States would also be asked to lower the sales tax. Obviously the overall fiscal considerations and concern over the impact of a possible increased deficit on inflation have carried the day but it might become necessary to rationalise and further reduce taxes, while working out future packages.

The burden on the ONGC and other government-owned integrated oil companies by way of subsidising the marketing companies will go up substantially. However even with their contributions — estimated to rise to Rs.60,000 crore from Rs.42,000 crore — there will still be a significant portion of under-recoveries left. The government plans to issue additional oil bonds whose size will depend upon the movement of oil prices. In a welcome move that should address one of its principal shortcomings, the RBI has agreed to provide liquidity to these bonds. Hitherto banks were buying these at a discount. But the bond route, also adopted to meet the burden of food and fertiliser subsidies, conceals the extent of the fiscal deficit and shifts the burden to the future. The relatively muted price hikes, it is claimed, will not significantly stoke inflation. However, they do not convey strong signals to reduce the demand for petrol and diesel. Though its individual components can be faulted, the latest package as a whole is perhaps the only practicable solution to the unprecedented oil shock.

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