The Hindu : Duty on oil products may be cut

Online edition of India's National Newspaper
Tuesday, Feb 18, 2003

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Duty on oil products may be cut

By Sushma Ramachandran

NEW DELHI Feb. 17. With prospects of a strike on Iraq by the United States still looming large, the Government is considering revising excise and import duties on oil products to cushion the impact of a steep rise in world oil prices. The oil marketing companies have already decided to defer the fortnightly revision of petrol and diesel prices in view of the volatility in world markets. Clearly, the companies are worried that a sudden spurt in international prices may upset earlier calculations over the next few weeks.

There is a provision for a quarterly review of prices in case changes are need in excise or import duties to maintain stability in domestic prices. A provision for this purpose had been incorporated when the administered pricing mechanism for the sector was dismantled in April last. At that time, a fortnightly revision was left to the oil companies but a quarterly review was to be carried out by the Government.

The review was meant for eventualities such as the present one where war fears have fuelled sharp fluctuations in crude prices. Last week, the Brent benchmark crude touched a high of $33 per barrel but moved down slightly after the report of the U.N.'s Chief Weapons Inspector, Hans Blix, indicated that a war was not immediately in the offing. The market volatility is disturbing policy makers here who are anticipating a sharply higher import bill in 2002-03 despite the fact that the quantity of oil products being imported is lower than ever before. The latest import-export data shows that the import bill had reached nearly $13 billion, about 20 per cent higher in the first three quarters of the current year than in the last. The ultimate figure will be much higher, given the hardening of prices in the last three months.

In such a scenario, the Petroleum Ministry has asked the Finance Ministry to examine a cut in the excise duty on crude oil as well as on products such as petrol and diesel. With the budget not far away, the oil companies must be waiting for concessions to reduce the burden on consumers even if the basic prices must be raised.

The system of shifting excise duties to maintain stability in domestic prices is used by several developing countries, such as Malaysia, to ensure that global volatility does not affect the internal market. At the same time, the Finance Ministry has to weigh numerous factors, not the least of which is the fact that resource mobilisation is becoming difficult with the overall decline in tariff levels. In addition, the level of non-oil imports has not shown much of an increase while industrial growth, on which excise collections depend, is rising at only about five per cent.

The Finance Ministry thus may not be enthusiastic about cutting back on excise duty in the oil sector. Even so, the political consequences of an unbridled increase in prices will have to be taken into account as well as the inflationary impact on the economy. Diesel price increases, for instance, have a cascading effect on the entire gamut of products and services. In this backdrop, the coming budget might see some reductions in excise or customs duty in the oil sector.

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