Inevitable blow

The diesel price hike levied at Rs 5 per litre and the annual ceiling of six LPG cylinders per family, from the government’s point of view, was a reform measure long overdue.

The common man may feel the pinch initially as inflation is already running high, but the government had little option but to reduce the ballooning budget deficit and to save the oil marketing companies which were bleeding profusely. While the case for a ‘rationalisation’ has been supported by the three oil marketing companies who showed under-recoveries of Rs 47,811 crore in the first quarter of fiscal 2013 alone, the inflationary spinoff from such drastic corrections in retail fuel prices too cannot be ignored.

Headline inflation in August was 7.55 per cent and is set to rise roughly 30 basis points with the latest price hikes. The LPG cylinder cap will have an equally deleterious impact. As it is, the price hike will have little or no impact either on the economy -- which is yet to bottom out -- or on the GDP growth equation which does not factor in fuel subsidies. As the lower median income groups struggle to come to terms with new diesel price tag, there is substantial onus on state governments to absorb a portion of the agony on the street. Sales tax on petro products in Karnataka is among the highest in the country. Karnataka had pared down sales tax on petrol from 28 per cent to 25 per cent, and on diesel from 20 per cent to 18 per cent way back in 2008. Successive fuel price hikes since then have levelled out the gains accruing from lower taxes. It is imperative to revisit these and a plethora of local levies and cesses which have caused disparities in diesel prices in different districts of Karnataka.

In the past, state governments of West Bengal, Kerala and Goa have foregone their share of taxes to mitigate the burden of higher fuel prices. Karnataka too has made noises in favour of cutting Value Added Tax to ease the burden of fuel hikes, though the results have been like water on the duck’s back. Reducing vendor commissions would be a Faustian bargain, as the government will be treading on a minefield of vested interests, but a reasonable degree of and clarity on the VAT front, besides lowering of entry tax to the region of 3 per cent would be desirable – that would help buoy the common man’s sentiments for a change.

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