Free Press Journal

No escape from oil subsidy in short run

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With crude oil prices having risen internationally by two-thirds in the past 11 months and considering that there is a no-subsidy policy in India in respect of petrol and diesel, there is a back-breaking burden on the Indian consumer that cannot be ignored. Elections in the BJP-ruled states of Rajasthan, Madhya Pradesh and Chhatisgarh are round the corner and general elections in the entire country are a mere year away so the groundswell of public anger needs to be capped before it is too late.

A resurgent and increasingly-aggressive Opposition is indeed breathing down the Narendra Modi government’s neck. All this points to the need for immediate measures to check the onslaught of oil prices. The Opposition seems to have no panacea for the ills, but while these parties are in the opposition, they can cry themselves hoarse without having palliatives in mind. If the Modi government was in no hurry, hoping to re-introduce subsidies closer to the 2019 general elections, it is time for a re-think. It is an unenviable situation for the Government with international prices crossing $80 a barrel and still rising and India hemmed in by 80 per cent of its requirements being met through imports.

While long-term solutions need to be put into shape immediately, short-term measures can hardly be postponed. 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. In such circumstances, saying goodbye to the no-subsidy policy seems the only workable option at least in the short term. Union minister Nitin Gadkari was hard put to explain recently that taxes levied on petroleum products were subsidising key welfare programmes of the government for the economically-vulnerable sections. But while this is food for thought, other ways of resource mobilisation have to be found quickly and effectively.


There is also the legitimate argument that if the fiscal deficit is to be kept under check, the subsidies cannot be allowed to run amuck. Innovative solutions need to be found and experts mobilised by the Modi government rather than depending on a limited pool of financial brains. Passing on a part of the subsidies burden to the Oil and Natural Gas Corporation is hardly a solution. With heavy capex plans and the acquisition of Hindustan Petroleum Corp Ltd as well as a challenging gas field of Gujarat State Petroleum Corp in the KG Basin, the company faces the risk of a rating downgrade if it is forced to borrow more to subsidise motorists. The corporation has a Rs 32,000 capex planned in 2018-19 after having spent Rs 72,000 spent in 2017-18. There is a real risk of more debt triggering a rating downgrade by international agencies which the corporation can ill afford.

There are a handful of short term solutions being looked at. 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. With the states in no mood to accommodate the Centre even if it is in overall national interest, this would evoke strong reaction for which the country has to be prepared. There is indeed a clamour for bringing fuel under the GST (Goods and Services Tax) but while this is a plausible way out and would perhaps be resorted to, it would be resisted by states because it 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.

While short term measures are imperative, the time is ripe, too, for fuel alternatives to be developed and harnessed on a war footing. Solar energy needs to be tapped on a massive scale and the conversion to electric vehicles must take place sooner than later. That the government is moving in that direction is a matter of satisfaction but the need for reducing dependence on imported crude cannot be over-stressed.