Now's the Time

The ongoing political turmoil in Arab lands has jacked up crude oil prices, which would add to domestic oil marketing companies’ under-recoveries and further distort retail prices of the main fuels. Petro-product pricing must reform to better reflect scarcity value. Scarce budgetary funds must not be frittered away on oil consumption of the non-poor . But with crude over $100 a barrel, it is time to reduce tariffs and duties on petro-goods , and to remove a panoply of distortions in the oil economy. Retail prices of petrol were decontrolled last year but continue to require government approval for any significant revision. We surely need genuine price decontrol, and especially of diesel, the most-used petroleum product by far. The tax component in both petrol and diesel prices needs modernising as well. Buoyant prices call for slashing the import duty on crude, and there’s a need to rethink the higher excise duty on petrol vis-a-vis diesel as a matter of policy. The duty differential is increasingly anachronistic, with some of the biggest cars burning diesel while petrol fuels two-wheelers . Further , local taxes levied by states on petro-goods must be moderated as well.

The point is that we need to discontinue collecting a disproportionate share of indirect taxes from petro-products , and broaden the tax base instead. Also, in the medium term, it would make sense to mandate a value-added tax structure for petro-goods , as is the practice in other high oil-tax regimes abroad. Such vital industries as transport, logistics and all energy-intensive segments generally would benefit by doing away with cascading taxes on petro-products , with tax only payable on the value-added and set-offs available across the value chain. Besides, kerosene subsidy can be abolished , and solar lanterns distributed to the poor. India and the G20 must address the financialisation of commodities like oil, which tends to harden prices. Note that global oil demand has gone up by about 1% in the last year but oil prices have spurted by about 50%! And along with the US, we need to press for reconvening the group of main oil consumers to talk down prices. But global initiatives would look silly in the absence of domestic reform.