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Rise in Oil prices hits economy hard

By K R Sudhaman. Dated: 9/16/2017 1:35:29 PM

Critical to any business is stability especially in prices to enable easy planning and execution. When there is volatility in Rupee exchange rate, exporters or importers usually demand stability in exchange rate rather than volatile rates even if there is sharp depreciation. It is no different when it came to oil prices in the country as volatile prices hurts not only industry but also agriculture as every activity is dependent on oil.
The daily revision of petrol and diesel prices, introduced in the country is certainly disruptive to the economy and the worst aspect is that the prices have crept upwards by over 8 per cent since it was introduced in June 16 despite the fact that the global oil prices have remained more are less stable. More problematic aspect is that the government is unwilling to respond to this issue particularly when the economy is on the downslide. Also when there are more than 300 million poor people in a huge population of 1.3 billion, the surging oil prices on a daily basis throws the entire economic activity out of gear. One may be surprised to know that petrol and diesel prices in India is one of the highest in the World and that apart there is a big variation in prices from state to state and city to city. One expected Goods and Services Tax will bring about uniformity in oil prices and that was not to be as it was kept out of the ambit of GST as not only centre and states wanted exploit petrol and diesel for more and revenue generation. This topsy turvy policy was hitting the economy hard.
Oil Minister Dharmentra Pradhan recently ruled out any government intervention to disrupt the daily revision in petrol and diesel prices saying the reform will continue. In the past, UPA government used to cut taxes to soften the blow when there was spurt in oil prices to minimize the impact on consumers, particularly common man.
Pradhan maintained that the criticism of the government for the spike is unfair and also the present spurt is a temporary phenomenon. In fact after introduction of daily changes in petrol and diesel prices, there was a period when the prices fell continuously for a fortnight or so and nobody at that time complained. The daily increase might have been incremental, cumulatively there has been Rs 5 per litre hike in prices of petrol, whereas crude oil prices have tumbled from $54 a barrel a month ago to a 52 week low of around $45 per barrel on September 13. So it is difficult to understand why the retail petrol prices in India are still raising. This is mainly because of over dependence by both states and centre on once major source of revenue. This also indicated skewed tax structure in the country under the garb of raising revenue of developmental activities.
Dismantling of administered prices is fine as part of reform measure and if that is case the government should clearly explain why market determined prices are rising when global crude prices are falling. Also how would government explain to common man this unusual phenomenon when 80 per cent of India's crude oil requirement is imported.
Domestic fuel rates have been aligned to movement of equivalent product prices in the international market since April 2002. Accordingly prices used to be revised every fortnight till the daily revision started a few months back. Fortnightly revision did provided some stability in prices and also accounting was easier.
Though Pradhan claims that daily revision immediately passes on benefit of reduction in international oil prices to consumers but this seems to have somehow has not happened. He may however be right is saying this has avoided sharp spikes by spreading them in small doses. "The government has no business to interfere in day-to-day operations of oil companies. If at all, efficiency is the only area government will interfere, he told the heads of state-run oil firms ruling out a change in daily revision of prices. He also maintained there was some spurt in global oil prices recently due to factors like hurricane in the US and softening in the rates have already begun. 13 per cent of US refinery capacity was shut down due to hurricane.
Opposition parties have latched on to this issue, putting pressure on the government to cut excise duty on oil to soften the blow. The Modi government had raised excise duty on petrol and diesel on nine occasions between November 2014 and January 2016 to withdraw the benefits arising from plummeting international oil prices. Duty on petrol and diesel was hiked in all by Rs 11.77 per litre and diesel by Rs 13.47 a litre during this period. The duty hike resulted in government's excise mop-up more than doubling to Rs 242,000 crore in 2916-17 and Rs 99,000 crore in 2014-15. This had greatly contributed to containing fiscal deficit, which was otherwise slipping during the last two years due to reduced revenue collections in other taxes and duties in the face of slowing economy. Demonetisation has worsened the situation as the economy has slowed down further.
In contrast UPA government reduced duty on oil to mitigate the suffering of common man as a result of spiraling global crude oil prices to the detriment of containing fiscal deficit. During the global financial crisis of 2008, oil prices shot up to $140 a barrel. Yet government ensured there was no drastic spike in domestic petrol and diesel prices by reducing excise duties. But Modi government has not been able to bring down oil prices even global crude oil prices hovered around $40-50 a barrel because they hiked excise duties substantially.
This approach of the government has pushed many economists to bringing petroleum products under the ambit of the game-changing Goods and Services Tax, which was rolled out in July. This will not only bring about uniformity in rates but also some stability in the duty structure. In fact there are nearly 3000 items that attract excise duty, now GST. But only 25-30 odd items accounted for 90 per cent of the revenue garnered by the government. It is high time that government seriously had a relook to ensure that revenue mop up become more balanced for the good of the economy and people. Petrol and Diesel dealers too are unhappy as it is disruptive and leads to lot of accounting problem. This also results in inventory losses to dealers whenever there is drop in prices. Also of the 56,000 petrol pumps, not many are still automated forcing them manually update prices on a daily basis resulting in serious operational difficulties.
Lately states are looking at the possibility capping value added tax on natural gas at five per cent and lowering it on petrol and diesel for those manufacturing units using as input in the face of growing agitation. The GST council may take up this issue in the near future. This is welcome development as this may pave the way for uniform GST rates on petroleum products but that is not going to happen in the near future as it being a major source of revenue.
(K R Sudhaman, has been Editor in Press Trust of India and Economics Editor in TickerNews and Financial Chronicle)
—[IFS]