Reports about an oil cess on income and corporate tax probably reflect the level of the government?s oil stress. The oil ministry was reported to have had the idea, but the finance ministry refused to put much weight behind it and the Prime Minister has said all proposals should be on the table when the Cabinet meets on Thursday. To be on the safe side, let?s give the cess idea the response it deserves. Oil isn?t a public good like primary education or road building, which is why a cess to fund these at least makes some sense. For a private good, the government cannot burden all taxpayers when ethically those who consume the item should pay directly. That is, people should have the choice of switching their consumption pattern in response to higher prices. This, of course, leads to the whole question of pricing oil to reflect its true market position, and that?s where the government is in an awful bind. But oil is at $135 a barrel and the under-recovery of oil marketing companies is projected at Rs 2,50,000 crore this year. So, the Cabinet meeting will be most interesting.
What?s the politically most feasible way to deal with this? Assuming the cess idea is out?by the way, a cess won?t get that much money anyway, less than 10% of the underrecovery?a combination of cuts in indirect taxes on oil and higher prices is the only option. Import duties are already low. So that means the finance ministry should agree to some cuts on domestic levies. At a time when deficit management has become a worry, this option can?t offer too much. Taxes on oil can be reduced; they are probably a shade too high. But they don?t constitute a public policy scandal. So, arguing that low taxes are the answer is bad public policy. How much of a price increase will be politically feasible? Hard to say really, but it would be stunning if the government agrees to anything more than a very moderate adjustment. Overall, the government will simply try to ease the problem a bit, not solve it, and keep on hoping this mess can be kept going until the elections. Pity the next government when it inherits the oil economy. And hope by then only one option is open: market pricing.
