Fuel price hike: Modi government cannot wait for solutions, must act fast

With petrol and diesel prices spiralling out of control, the Narendra Modi government which rode to power in 2014 on low oil prices is today facing growing anger, especially among the middle class which formed the backbone of BJP’s steamroller win.

Elections later this year in Rajasthan, Madhya Pradesh, Chhattisgarh (all BJP-ruled states) and Mizoram and then the general elections next year are understandably giving the BJP-run government jitters.

While international crude oil prices are skyrocketing what is fodder for the Opposition is that for every litre of petrol, the Centre and state governments charge an over 50 per cent tax in India, which is one of the highest in the world. There are understandable reasons for it but it is inexpedient for the Opposition to cite those.

The Modi government is hard put to explaining that subsidising petrol and diesel would take away money from social welfare schemes and send India’s budget deficit soaring with disastrous consequences in the shape of inflation.

Petroleum imports in India are a legacy issue with governments in the past as now having done little to augment production. With 80 per cent of India’s oil needs being imported, India is truly in a no-win situation when international supplies are hampered.

There are a few reasons crude is up globally, principally US President Donald Trump’s decision to escalate relations with Iran by withdrawing from the Iran nuclear deal besides intensifying sanctions,
and political and economic instability in Venezuela, a major petroleum exporting country.

While oil in the international market ruled at USD60 a barrel in 2015, today it is at $80 plus and it could well hit $100 by this year-end.

Experts say every rupee’s reduction in taxes per litre of fuel causes a Rs 13,000 crore annual loss to the Indian exchequer. Neither the Centre nor the states have the financial strength or the willingness to take this hit. One solution being actively thought of is to reduce excise charged by the Centre and VAT (value added tax) charged by the states. The central government levies Rs 19.48 excise duty on a litre of petrol and Rs 15.33 on diesel. State sales tax or VAT varies from state to state.

But with the contentious attitude of states to any sacrifice expected of them, this would evoke strong reaction for which the country has to be prepared.

Bringing fuel under the GST (Goods and Services Tax) will reduce the government revenue from tax collected from fuel by nearly Rs 2 lakh crore.

This is on assumption that the GST is 18 per cent on fuel. If the Centre makes bold to charge 28 per cent there could be some succour but that would disturb a hornet’s nest. Nevertheless, what is imperative has to be bulldozed regardless of hostile reaction.

The government is also believed to be looking to the ONGC (Oil and Natural Gas Corporation) to share the burden of price reduction in petrol and diesel by subsidising it. Considering that ONGC supplies an estimated 20 per cent of the country’s total crude oil requirement to refining cum marketing companies Indian Oil, Hindustan Petroleum and Bharat Petroleum, this could make a fair impact.

The key would of course lie in the extent of subsidy that is worked out. At present, the government subsidises cooking gas, LPG and kerosene with petrol and diesel being left out, but political pragmatism requires that the subsidy be extended to them too.

Another move of the Central government is to ask Reliance Industries, Royal Dutch Shell and ONGC to pay $3.8 billion as the enhanced share of the Government’s earnings from the Panna-Mukta and Tapti fields after a UK court rejected challenges to an arbitration award.

All in all, the situation is getting more serious by the day with prices constantly on the rise. The Government cannot wait any longer for solutions. It needs to act fast, and after examining all aspects.