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OPEC Meeting On Friday Crucial For NDA Government

Mr. Jaitley may not be back at North Block but is certainly making his presence felt through social media. His latest blog hits out at former Finance Minister P. Chidambaram’s idea of capping excise duties on petroleum products at Rs. 25 per litre. Describing it as a trap, he says such a plan will end up by pushing the country into unmanageable debt. No doubt he is alarmed by the idea, since it has been estimated that a one rupee cut in excise on oil products will lead to an annual revenue loss of Rs. 13000 crore. A drastic cut in excise duties can thus create serious shortfalls in revenue inflows and impact efforts to keep the fiscal deficit in check. So far the NDA government has been able to consistently keep reducing the deficit for the past four years. It is committed to keeping it within the target of 3.3 per cent in 2018-19 as compared to 4.5 per cent during the last year of the UPA regime.This has resonated well with foreign credit rating agencies and investors which have been impressed that it has not succumbed to populist pressures and kept to its fiscal targets.

But one of the main reasons for being able to maintain such discipline has been the bounty showered on this government by the crash in world oil prices shortly after it assumed power. Prices had reached a low of 40 dollars per barrel in 2014, a far cry from the peaks of 100 dollars per barrel that had to be dealt with by the UPA. To take full advantage of the low oil prices, the new government reduced fuel prices only marginally and instead increased excise duties on petroleum products. As Mr. Jaitley himself points out in his blog, duties were raised nine times since 2014. This brought in a revenue bonanza for the exchequer which has been used to balance the central budget. 

International prices started hardening, however, in the last quarter of 2017. These have now risen to about 73 dollars per dollar of the benchmark Brent crude, though it had reached a peak of nearly 80 dollars just a few weeks ago. Excise duty has only been reduced once since then so consumers are bearing the brunt of the high oil prices. This has naturally increased inflationary pressures on the economy. The inflation rate has recorded a rise of 4.28 per cent in March to 4.58 per cent in April 2 this year, largely due to higher fuel prices.The Reserve Bank of India has, in turn, raised interest rates at its latest meeting in line with its role of keeping a check on inflation, a move which has naturally not been viewed favourably by the Finance Ministry.

The question is, what is the government now going to do to deal with the situation. It should ideally try to shift crude oil and petroleum products  to the discipline of the Goods and Services Tax (GST). But there is no movement simply because states, of which a large number are ruled by the BJP are opposed to taking away this cash cow from their purview. The central government should ideally be able to convince at least the BJP ruled states, which are now in a majority, to put oil products under the new tax and hence easily have the proposal approved by the GST Council. But for some strange reason, there is little movement on this issue apart from declarations being made that the centre is keen to put petroleum under GST.

As a measure of relief to consumers, both retail and industrial, the government should at least cut excise duties to some extent and try to raise additional revenue from other sources such as disinvestment. But it appears that the Finance Ministry is watching the international market and waiting for prices to subside instead of taking any concrete action for the time being. The fact is that oil prices have already slid down from their peak of 80 dollars largely because there is a realization by major producers like Saudi Arabia and Russia that extremely high prices could lead to a drop in demand. Besides, shale oil production has also picked up recently in the U.S. which will contribute to the softening trend. Hopes are being pinned on the forthcoming meeting of the Organisation of Petroleum Exporting Countries (OPEC) on June 22  where production quotas are expected to be raised significantly. Russia which has been acting in collaboration with OPEC since the middle of last year is also reported to be in favour of raising output in line with the cartel.

The future outlook for fuel prices for the Indian consumer thus depends right now more on OPEC rather than the government. In case the OPEC meeting brings some relief in terms of higher production quotas for members, world prices are bound to recede to some extent. This in turn should lead to a decrease in prices of petrol, diesel and other petroleum products at the retail level in this country within a few weeks. But if these hopes are belied, the government may need to take some hard decisions to provide relief to consumers, otherwise inflation will spiral out of control. In addition, it would be politically unwise to allow high oil prices to continue in a year when the ruling party faces elections in several states and ultimately the general elections next year. The OPEC meeting will thus have a high stakes outcome not just for the members of the cartel for the political future of this government.

(Views are personal.)

By TIS Staffer
the authorBy TIS Staffer

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