The government?s much agonised decision over petrol price adjustment is, as expected, 20% economics and 80% politics. The price hikes will raise an additional Rs 21,000 crore in revenue for the oil marketing companies. The finance ministry has also buckled under pressure and agreed to import duty cuts of 5% across the board, along with limited cuts in excise duty. Duty cuts are expected to cost the finance ministry Rs 22,660 crore this year, an amount that will now accrue to the oil marketing companies. All this accounts for around 20% of the total annual losses expected to be incurred by the public sector oil marketing companies, at the current global prices for crude oil. The rest of the 80% is political budgeting?oil bonds and ?contributions? from upstream oil companies. Globally, there is now, a growing mismatch between increasing demand for oil, fuelled in part by booming China and India, and the supply capacities of oil producing countries?Iraq, with the third largest reserves, is still producing below potential, oil extraction infrastructure is in short supply and some oil-bearing areas present technological and/or environmental challenges. It is these and not dark deeds by speculators that?s keeping oil prices high. So, given the global demand-supply situation, there can be no new rabbits out of the oil policy hat in India.
Oil bonds worth Rs 94,601 crore for the remainder of this fiscal year have been announced. As pointed out by our columnist today, while oil bonds do not get added to the official figures of gross fiscal deficit, due to clever accounting, it does add to the liabilities of the government, nonetheless. Government deficits, as already noted in these columns earlier, are getting back to levels where fiscal correction again becomes a worrying priority. Add the revenue reduction forced by oil politics, add the impending implementation of the pay commission report?pay hikes for government officers are by themselves good, but there?s no reason to combine them with freebies?and the likely expenditure on more sops before the general election, and you have a fiscal scenario that looks distinctly pre-reform. And, of course, an out-of-control fiscal deficit does not help either inflation control or interest rate softening. This is the price of 80% politics.
