The Hindu Business Line : The oil burden

The Government appears to be preparing to increase domestic fuel prices very soon; a decision is likely as early as Friday when the Group of Ministers (GoM) sits down to discuss the issue. The last time prices were increased was in June 2006 when crude oil was trading at $65-70 a barrel and the dollar was in the Rs 45-46 band. Eighteen months later, crude prices have lapped the $100 a barrel mark. They may have retreated since below $90 in the past fortnight and the dolla r may have depreciated vis-À-vis the rupee by about 12 per cent to under Rs 40, but the fact is that global oil prices are still high and the government needs to pass on at least some of the increase to consumers. There are other options, of course, such as reducing taxes on petroleum products and issuing bonds to the oil companies to cover their under-recoveries. There may be a case for reducing taxes and duties to absorb a part of the price shock. In fiscal 2006-07, the Centre and State governments were richer by Rs 1,56,000 crore in the form of taxes and duties on petroleum products. Given the overall buoyancy in other tax collections, the government could consider forsaking some of the duties on petroleum. Issuing bonds to oil companies merely postpones payment day, passing the burden to a future generation.

The government may not be able to escape its obligation to align domestic fuel prices with global levels gradually over a period of time; given the vast gulf now between domestic and international prices, especially in products such as cooking gas, it may not be feasible to rationalise prices in one go. As long as prices are subsidised, there is no incentive for users to use energy efficiently. The example of the US, where record high gasoline prices resulted in a fall in sales of gas-guzzling sport utility vehicles (SUVs) shows how prices can impact consumption patterns.

In short, while higher fuel prices impose a discipline on the consumer, subsidised, low prices often promote the opposite. There is also another reason why the government ought to promote energy efficiency, and that is climate change. Governments the world over are exercised over carbon emissions from rising consumption of fossil fuels and their impact on global weather patterns. As a growing economy with increasing appetite for fuel, India cannot afford to look the other way when the rest of the world is examining ways of reducing emissions. Promoting energy efficiency by aligning domestic fuel prices to international levels will send out a strong signal on India’s commitment to protecting the environment.

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