Govt right in not reducing oil prices

Govt right in not reducing oil prices

Any responsible govt needs additional revenues to take up welfare projects in health, education, etc.

International crude oil prices have fallen from a high of $110 per barrel in March, 2014 to a low of around $30/b in early February of this year. This is a remarkable decrease of 72%, a decrease which was hardly predicted by any of our oil pundits. But the drop in India’s petrol price during this period is only 18%. Why and How?

When international oil prices were falling, the Union government used the opportunity to increase central excise taxes on petrol by Rs 11.86 per litre and on diesel by Rs 13.68 per litre. During the last 19 months, the government increased the taxes on these two products 10 times by small amount each time. Had the taxes been raised in large amount, the public would have felt the pain and protested.

As usual, some of the state governments ruled by opposition parties did protest against such justifiable increases. There was no compelling need to share the windfall of oil price decline with the consumers of these products. The previous UPA government had reduced excise taxes by Rs 5 per litre when oil prices went up for purely political reasons.

In a country where about 20% of the population live under starvation poverty line ($1.90 per person per day) and about 53% under multi-dimensional poverty line (which takes into consideration access to education, health, transportation etc), any responsible government needs additional revenues to take up welfare projects in health, education, water, rural development.

There is no better and simpler way to raise resources than to tap petroleum products. Of course these steps of additional resource mobilisation are justified only if the government succeeds in spending the money to alleviate poverty with minimum level of corruption and leakage.

Like India, many governments around the world have made use of the opportunities provided by the drop in oil prices. But there are not many governments who have increased in taxes like the NDA. But many including Saudis have reduced the subsidies on petroleum products. Unfortunately NDA has failed to take any initiatives in this direction perhaps as a result of electoral setbacks in Bihar and Delhi.

But the NDA government deserves credit for adapting Aadhaar platform to distribute residential LPG subsidy directly to the beneficiaries. This has resulted in reducing the misuse of subsidised LPG for other uses.

The NDA policy of urging people to voluntarily give up LPG subsidy is not a success. Out of 16 crore, only 57 lakh have agreed to forego the subsidy. A new policy which has become effective from January 1, this year of eliminating subsidised LPG to families with more than Rs 10 lakh annual taxable income will also not help much in reducing subsidy burden. A more progressive but less populist step would have been to eliminate the sale of subsidised LPG completely.

LPG subsidy

The LPG subsidy was introduced in 1980s to popularise its use. A survey has shown that bottom 40% of the poorest get 13% of the subsidies while top 60% get 87%. It is only fair that those who use LPG pay for it and the burden be not shared by the rest. Such a market based price policy reduces corruption since there is no subsidy to be exploited by the dealers by diverting LPG meant for residential consumers.

Subsidy amount has fallen drastically from about Rs 850 per LPG cylinder in early 2014 to about Rs 100 today as a result of fall in oil prices. As in the case of petrol and diesel, LPG consumers would not have protested had the government reduced the subsidy over a period of four or five months.

Reduction of the subsidy by Rs 20 or Rs. 25 a month would not put a huge burden on non-poor families. Poor families who are not a large percentage of LPG consumers can always be assisted through the direct benefit transfer (DBT) system. 

Fall in oil prices will help India to save a whopping foreign exchange of Rs 5,00,000 crore ($ 74 billion) in a year. Through increase in excise taxes on petrol and diesel the government should be able to mobilise Rs 1,45,000 crore per year additional revenues. While the former should help to improve the trade balance, latter should help to reduce the fiscal deficit. Will these twin developments lead to strengthening of rupee and reduce inflation?

The masterful strategic stroke on the part of NDA was securing an agreement with UAE in filling the crude oil strategic storage at a time when oil prices are low. It is a win-win situation for UAE and India.

For UAE, it can sell the stored crude at a later day at higher price and use part of the storage for trading purposes. Many other OPEC producers specially Iran had to pay for storing their surplus oil while UAE gets free storage. India gets 67% of the oil stored by UAE free of cost.

Let us hope that the Indian negotiators will not commit the mistake like those who signed the long term LNG import contract with Qatar during the UPA rule. Thanks to the tough stand taken by UPA government, Qatar agreed to ignore penalties of more than Rs 10,000 crore and renegotiate better terms to lower costs.