The surge in global crude oil prices poses a risk to the Centre?s fiscal consolidation plan, with the oil marketing companies (OMCs) unable to pass on any increase in diesel prices because of price regulation. It is high time the Centre fine-tuned its taxation and subsidy policy for diesel.
The Centre has maintained a lower excise duty for diesel compared to petrol to fight inflation. But an unintended fallout of the differential taxation policy is the uncontrolled growth in diesel car sales, which increased the subsidy burden. OMCs are losing Rs 7 a litre on the retail sale of diesel, as crude oil prices hover above $90 a barrel in the international market. Indian Oil Corporation alone loses Rs 70 crore a day on the sale of diesel.
The government needs to better target diesel subsidy, as there is no rationale in subsidising diesel bills of luxury car-owners. A shift to direct diesel subsidy would bring transparency in diesel pricing. That would in turn help build political consensus over deregulation.
?We should have a transparent mechanism in place so that the impact on end product prices is known to market participants. Mitigation to end-consumers should be done by rationalising end-product taxes as international crude prices move in certain bands. Besides, diesel subsidy should be better targeted, says Dilip Khanna, partner, Ernst & Young.
However, persuading states to rationalise their diesel taxes might prove a big challenge for the Centre. It has freed petrol pricing but backed out on the promise of diesel price deregulation for fearing a political backlash. Diesel price deregulation would be a hard choice for the Centre unless states agree to rationalise taxes on the auto fuel.
However, the existing fuel subsidy mechanism is not sustainable. India?s fuel subsidy burden crossed Rs 1 lakh crore in 2008-09. With the Centre struggling to manage its fiscal deficit, a further spike in the international crude oil price could easily make its plan go haywire.
Globally, India was the fourth biggest provider of fuel subsidy after Saudi Arabia, Iran and Russia in 2009, according to the International Energy Agency. While petrol prices have been decontrolled, under-recoveries of OMCs on the retail sale of diesel, LPG and kerosene are still high and could cross Rs 70,000 crore this fiscal. It is ridiculous that a country like India finds itself clubbed with the world?s biggest energy exporters on fuel subsidy.
?The choice of implementing ad-hoc regulatory measures like price control, taxes or subsidies as a reaction to volatile crude prices is no longer available for our economy. All political initiatives concerning protection of a section of customers should now be managed through independent measures like direct subsidy?, says Sanjay Kaul, governing board member, University of Petroleum and Energy Studies.
Most states levy an ad valorem duty on diesel. The tax burden on consumers go up when OMCs increase the retail price of diesel. The Centre?s apprehension is that, after deregulation, diesel prices could go up steeply.
Finance minister Pranab Mukherjee had factored in a moderate crude oil price range of $80 a barrel while setting his fiscal deficit target for the current fiscal. But crude oil prices have surged far beyond India?s comfort range in recent weeks. If the current market trend continues, we could soon see crude prices reach $100 a barrel, much to the discomfort of Mukherjee.