Wrong Signal

The government has finally got round to increasing petroleum product prices. By how much is still not settled because the prime minister has, giving in to a threat to withdraw support by Trinamul Congress leader Mamata Banerjee, promised to review the revised prices announced by petroleum minister Ram Naik. But whatever the final level at which the retail prices are pegged, one thing is clear. The government has chosen to absorb most of the impact of higher global prices of oil in the form of debt, putting upward pressure on interest rates at a time when the economy shows every sign of running out of steam yet again.

The action that has been taken consists of price increases totalling Rs 7,600 crore, duty cuts worth Rs 4,000 crore and oil bonds to be issued to cover the balance Rs 12,000 crore. The only sensible thing about the way the government has hiked prices is that the price differential between kerosene and diesel has been brought down somewhat and thus the incentive to adulterate the higher priced fuel weakened. The official estimate of the oil pool account deficit by the end of the financial year, if crude prices averaged $30 a barrel and domestic retail prices remained unchanged, is Rs 23,600 crore. Earlier, the government had apparently proposed to distribute this burden equally on the three instruments: price hikes, duty cuts and bond issue. The finance ministry has successfully diluted the move to whittle its revenues. The relief to the oil pool account arising from the tariff cuts – of customs and excise duties – has been only half the original target of Rs 8,000 crore. But this is wasted effort on the finance ministry’s part. When duties are cut, the result is a widening of the fiscal deficit, forcing the government to borrow higher. Exactly the same thing happens when the size of the bond issue increases to avert duty cuts.