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How rising oil prices are giving Modi government a headache

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MG Arun
MG ArunJun 05, 2018 | 12:23

How rising oil prices are giving Modi government a headache

The high prices of fuel, a result of global crude oil prices that have been increasing in the past few months and are currently reigning at over $76 (Rs 5,000) a barrel for Brent crude, have become a hot potato for the Union government. While the price of petrol crossed Rs 85 a litre in Mumbai last week, it was close to Rs 78 in Delhi. Last week, a meagre one paise drop in fuel prices by the Indian Oil Corporation caused wide spread criticism of the Modi government.

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The government, meanwhile, seems to be lost for a solution and is looking at states to reduce taxes on fuel. Incidentally, Kerala, ruled by a non-BJP government, is the only state to reduce taxes and retail prices by Rs 1.

The Centre is also suggesting building a consensus among states to bring petroleum products under the Goods and Services Tax. Although global prices have softened in the past few days after Russia and Saudi Arabia agreed to increase production, the long-term scenario is still hazy, with experts saying that prices are likely to keep rising in the near future.

The prices of petroleum products are deregulated in India. But the Modi government went one step ahead and implemented dynamic pricing of fuel, where fuel prices change daily according to changes in global prices. While this was welcome at a time crude prices were reigning at low levels, it backfired when prices began to surge globally. Moreover, the government has been criticised for windfall gains it has made from taxes and other royalty payments from oil companies.

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According to reports, the Union government has made windfall gains of close to Rs 10 lakh crore in the past 3.5 years on petroleum products. The states also cannot shirk from their contribution to the high fuel prices, since they made Rs 6.6 lakh crore gains in the same period from these products. The government, which had been able to run a tight ship in terms of fiscal discipline from the gains from taxes on fuel, finds itself at the receiving end of the high prices.

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What are the options that the government has? According to sources, the government is not going to backtrack on reforms it had brought about in the oil sector — linking of domestic prices with global prices daily.

If it backtracks, then that will send a negative signal to the investor community and the rating agencies, which the government does not want to do now. It is more likely to ask oil companies to absorb part of the fuel price rise, which will be a sort of subsidising that used to happen before full deregulation of the sector occurred.

This will put a strain on the finances of the oil companies temporarily, but that is something the government can adjust by issuing bonds, etc. It may also marginally cut excise duties, and the twin measures can bring some respite to consumers.

(Courtesy of Mail Today)

Last updated: June 05, 2018 | 12:23
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