India's Oil Crisis

As the NDA regime enters the last year, the government is in a tizzy over high petroleum product prices. The crisis is bigger in India since these products are heavily taxed. As a result, the government is running out of options. For the BJP, high fuel prices are becoming counterproductive. There are two solutions: a) Reduce taxes on these products or b) Ask oil companies to offer discounts. The second will undo the work done in the last four years to clean up the books of oil companies by giving them pricing freedom.

A back-of-the-book calculation suggests a Rs 1 reduction in excise duty would mean reduced collections of Rs 13,000 crore. Also, every $10 rise in crude prices per barrel slows growth by 0.2-0.3 percentage points and fuels WPI inflation by 1.7 percentage points. India may need an additional $30 billion to buy last year's quantity of crude.

One reason for high retail prices is high taxes. One way out is to bring petroleum under GST, but states will find it difficult to adjust to this. The finance ministry expects to mop Rs 2.57 lakh crore from petroleum this fiscal and a similar amount will go to states to fund 116 social sector schemes and ongoing infrastructure projects. This is a quarter of indirect tax collections and 40 per cent of states' revenues. Even if states agree, the new arrangement will take three-four months to stabilise.

Crude prices are on the boil because of two reasons: a) The fear premium, because of the US sanctions on Iran and b) OPEC, along with Russia, continuing with curbs on oil production. With no option but to cut taxes, India is hoping that international prices come down. That seems difficult for now.

@anileshmahajan