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The Congress led UPA government, which had been dithering on the on the vexed issue of raising the domestic prices of petroleum products even as the global price of crude was skyrocketing, has finally been compelled to act. It has taken a series of steps on the pricing and duty structure and taxation of petroleum products.
One, the government has decided to increase the price of petrol by Rs.5 per litre, diesel by Rs.3 and LPG by Rs.50 per cylinder. The price of kerosene has been left untouched. The price of petrol, currently Rs.45.56 a litre in Delhi, will now cost Rs.50.56 or 11 per cent more, while diesel, which retails at Rs.31.80, will now cost 34.80 or 9.5 percent more.
Two, the finance ministry has reduced the customs duty on crude oil from 5 percent to nil, and on petrol and diesel from 7.5 percent to 2.5 percent. The customs duty on other petroleum products like aviation turbine fuel (ATF) and naphtha has been reduced from 10 percent to 5 percent.
Three, the excise duty on petrol and diesel has been cut by Rs.1 a litre each.
Four, the Prime Minister has constituted a high-powered committee under the chairmanship of Mr B.K. Chaturvedi, Member, Planning Commission to examine the financial position of Oil Companies. According to an official communiqué, the committee will examine the impact of the increase in oil prices between 2004-05 and 2008 on the financial position of oil companies, including upstream exploration companies, refiners and downstream oil marketing companies (OMCs). It will also examine the available options for burden sharing by all stakeholders, including upstream exploration companies, refiners, downstream OMCs and stand-alone refiners. It will also analyse the cash flows and the profitability of all three groups of companies so as to get a clear picture of the changes taking place in their operating positions, particularly the impact on access to credit and cash availability for their operations.
What the government did not do was to impose a windfall tax on the oil exploration companies which are benefiting from the rise in the price of crude. This had been a demand of the left parties but it has been ignored. It appears the Left parties were not consulted and only informed of the cabinet decision to raise prices.
The package of measures taken by the government will have an impact on several fronts. First, the increased retail prices of petrol, diesel and cooking gas will push up the wholesale price index into double digits. M. S. Srinivasan, Secretary, Petroleum reckoned that the increase in fuel prices would raise inflation by only 0.5-0.6 percentage points to around 9%. However, the increase is likely to be more.
Second, the increase in fuel prices will have a negative impact on both consumption and growth. The GDP forecast for India is being lowered by most analysts. Lehman Brothers, for example, has revised GDP forecast to 7.3% from & 6% for the current fiscal year.
Third, the government's fiscal deficit will widen. The central government is projected to incur a revenue loss of Rs.226 billion in the current year on account of the duty cuts on crude oil. The five percent customs duty cut on crude oil will lead to a revenue shortfall of Rs.155 billion while the duty cut on petrol and diesel from 7.5%to 2.5% and the excise cuts will further reduce the revenue by 66 billion. The loss of revenue will push the fiscal deficit to 4% of GDP way beyond the budgetary target of 2.5%.
The finances of the oil marketing companies will improve as they got most of what they had wanted from the government. The under recoveries of the oil companies, which is projected to be around Rs.2450 billion, will be reduced as consumers on account of price hike will contribute an additional Rs.211.20 billion, customs and excise duty cuts contribute Rs.266 billion, ONGC and GAIL contribute Rs.650 billion leaving a gap of Rs.950 billion to be financed through oil bonds
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