Government needs to insulate the economy from global crude oil prices volatility

Time is ripe for the finance minister Arun Jaitley to wind down the steep increase in excise duties on diesel and petrol and pare the spurt in crude prices globally. Financial Chronicle in its January 15 edition reported the possible slash of the excise duty, a likely Rs 2 per litre, that is being considered by the finance ministry on both diesel and petrol.

This will not only bring the much desired relief to consumers but also make travel cheaper across segments. Reduction in diesel duties will, in particular, serve as succour for the hapless farmers who are hit the hardest, owing to retail prices volatility in farm products.

The very premise on which the excise impost on petrol and diesel were increased nine times from November 2014 was the modest crude prices, which hovered below $50 per barrel globally.

Till date, finance minister Jaitley made good his financial balance sheet by increasing excise duty on petrol by Rs 11.77 and diesel by Rs 13.47 per litre respectively. Even when the inflation and the interest rates hit the roof, Jaitley had slashed the imposts only once, again Rs 2 per litre on both diesel and petrol.

General budget to be presented on February 1 should be an occasion to unveil responsible policy measures by providing relief worth Rs 25,000 crore, given the huge increase in retail prices of both diesel and petrol in last few months. Jaitley will have to prioritise providing relief to farmers that use diesel for agriculture purposes given the near collapse of prices of key farm products like potatoes, tomato and onions, even while consumers paid through their noses in the cities.

If Jaitley is able to sacrifice revenues on diesel and petrol, then this key measure could boost consumption across sectors especially the automobiles and two wheelers. While slashing the excise duty on petrol and diesel, Jaitley will do well if he announced a roadmap for including these two products under goods and services tax (GST) and peg them at 18 per cent. This will not only eliminate the anomalies in differential duties charged across states, but provide further relief to retail consumers. But, revenue losses suffered by states owing to lower duties need to be factored in while announcing the shift of petrol and diesel to GST.

The huge spurt in import bill that’s expected to cross $90 billion vis-à-vis $70 billion previous year on sourcing crude oil should be factored in, while deciding on the excise duty cuts on diesel and petrol.

Till the shift of petrol and diesel to GST, Jaitley will have to adhere to basic principle of dividing the higher crude prices three ways between retail consumers, refining companies and upstream firms. And, even this could only be a short-term measure and not a permanent solution.

Larger objective of pricing petrol and diesel should be to insulate the Indian economy from global crude oil prices volatility and build up Indian buffers. This is precisely what the NDA government led by prime minister Narendra Modi attempted owing to modest crude prices that hovered at $40 per barrel for several months. Given that 82 per cent crude requirements are met through imports and crude shot up to $67 per barrel, a rebalancing of duties and, thereby, retail prices was warranted.

Curtailing fiscal deficit and the phasing out of the current account deficit should be the immediate goals for finance minister while providing relief to retail consumers of diesel and petrol. Coupled with this scaling down, the crude imports by 20 per cent annually from current levels of 213.5 million metric tonnes should be achieved without let up. Only investments in oil and gas assets internationally with long-term buyback arrangements can achieve insulation of Indian economy from global energy markets.