The government decision to push forward with a token increase in the retail prices of petrol and diesel?by Rs 2 per litre and Rs 1 per litre, respectively?is almost an insult to India?s oil companies, which have been suffocated by administered pricing these past few years. To put the issue in perspective, note that the price of one barrel of India?s crude oil basket has almost doubled over the last three years from $49.2 in March 2005 to around $92 last month. But the three upward revisions and two consequent retail price cuts over this period have cumulatively increased fuel prices by just a fifth in the case of petrol and around a tenth in the case of diesel, Thursday?s hikes included. If that?s not appalling enough, the new prices will still be lower than those charged in early June 2006. Consequently, fuel retailers continue to lose a lot of money on every vehicle tank they fill.
This is in effect a massive subsidy programme that the government cannot even afford, fiscally speaking. This is why the Centre?s first resort to plug the losses incurred by these companies is to issue oil bonds, and then hope that international crude prices begin to descend. The proportion of losses financed by such bonds are now set to go up even further, by around 10 percentage points, to almost 56%. This works in the short-term. But it erodes the credibility of the government?s financial statements. If raising prices is politically difficult, an alternative would be to slash indirect taxes on oil products further. Though a series of tax measures?including a halving of customs duty on crude imports to 5% over the last four years and elimination of customs/excise on PDS kerosene and LPG products?has helped lower the incidence of taxes on oil products, there is scope for more. Figures for the last three years show that while the oil sector?s contribution to the central exchequer has gone up by around a fifth to Rs 93,802 crore, its contribution to the states has zoomed up by a stupendous 44% to Rs 62,121 crore. Clearly, it is not the Centre alone that must act. But act, the system must. Without rolling back central and state-level taxes on oil products, oil companies will be pushed over the brink. And unless some creative way is found for refinancing this grand populist show on the cheap, the oil bond trick cannot be stretched too far.