No lack of courage

By Prem Shankar Jha

Three years ago, when a rise in oil prices had pushed up the oil pool deficit the United Front Government took more than seven months to make up its mind on how to balance the account. While it dithered the oil pool deficit grew by Rs. 900 crores a month till it reached an almost unmanageable Rs. 20,000 crores. The contrast between that and the decisiveness with which the Vajpayee Government has acted in the face of the rise in oil prices that began two years ago could not be greater.

Since it first came to power 30 months ago oil prices have soared from around $16 a barrel to a peak of $38 a few weeks ago, before subsiding to $30 to $32. Despite that the Government has lost no time in adjusting oil product prices to absorb the shock. It did so the first time last October on the last day in office of the caretaker government. It did so with even greater decisiveness last Friday.

Not only did the Government take less than a month to make its decision after the Petroleum Ministry raised the alarm in public, but the decision it has taken is the best that anyone could have crafted. The increase in administered prices announced will bring in Rs. 7,560 crores during the remaining half year. Cuts in import duty on crude oil and oil products and in excise duties on petrol and diesel will reduce the gap by another Rs. 4,429 crores. The Ministry has also asked for the return of an earlier oil pool surplus of Rs. 4,500 crores taken by the Finance Ministry. All or most of the remaining deficit will be capitalised by issuing oil bonds.

It would seem, therefore, that the Government has lived up to its promise of using all three methods to cushion the shock on the consumer. Its behaviour stands out in sharp contrast to that of western European governments that have refused to lower even heavier ad valorem taxes in the face of the oil price hike until forced by their public to do so.

In fact the Government has done a great deal more. To begin with there is absolutely no make-believe in this decision. The price hikes have been made on the assumption that the price ex-Dubai will not go down below $30 a barrel not only this year but in the foreseeable future. This can be seen from the fact that in a full year the increase in administered prices will net Rs. 15,000 crores while the reduction in taxes will save Rs. 9,000 crores. That will fully meet the needs of the oil pool account in 2001-02 and future years, even if oil prices do not fall.

But the Petroleum Minister, Mr. Ram Naik, knows perfectly well that oil prices will fall. This is because the high prices have not been caused solely by OPEC's success in coordinating and limiting production, but a convergence of three, possibly four other developments. The three reasons are the prolonged American boom, which gained a fresh lease life in the second half of 1999; the sharp depletion of stocks of oil products and oil with the major companies during the summer driving season; and the need not only to replenish these stocks but to build them up further to meet the augmented demand of winter. The possible fourth is speculation.

Indeed so sensitive is the oil market today that the President, Mr. Bill Clinton's announcement that the U.S. would release a mere 12 million barrels of oil from its strategic reserve caused prices to fall last week by $2 a barrel. All these trends are likely to reverse themselves in the near future. The American boom is finally petering out, and economists are beginning to discuss whether the U.S. economy will have a 'soft' or a 'hard' landing. The replenishment of oil stocks will end in at most two months. And at the OPEC heads of state meeting in Venezuela, Saudi Arabia broke ranks with the other members to announce that it would increase production to the extent necessary to stabilise prices. Mexico, although not a emmber of OPEC, followed suit.

Past experience has shown that it is far more difficult for OPEC to co-ordinate production cuts when demand falls than to co- ordinate increases when demand rises. Thus there is every likelihood that oil prices will fall to $20-25 a barrel by early 2001. A decline of this magnitude will virtually wipe out most of the remaining subsidy on kerosene and cooking gas and all of the remaining subsidy on diesel.

Mr. Naik seems to have foreseen this and decided that he will use the cushion created by the fall to deregulate oil prices altogether. This is apparent from his remark that the latest round of price hikes and duty cuts has created the base for deregulating oil product prices by 2002, that is, phased over the next two budgets. This is the kind of focussed strategic planning that has been missing since the demise of Narasimha Rao's Congress government. Mr. Naik needs to be congratulated for having brought it back.

Nor is he the only Minister who deserves praise. The decision to cut taxes in order to forego Rs. 9,000 crores a year could not have come easily to Mr. Yashwant Sinha and the Finance Ministry. This is admittedly only two-thirds of the windfall gain in taxes from the rise in oil product prices. But coincidentally Rs. 15,000 crores is just about the amount that the Government is foregoing in customs duties on account of its plethora of export promotion schemes.

As Mr. Sinha has the onerous duty of reducing the country's fiscal deficit, his initial reluctance to cut taxes was fully understandable. The right course for him would be to overhaul the present completely irrational tax and subsidy structure at the same time as Mr. Naik deregulates oil product prices. Were he to impose a single VAT of say 16 per cent on all oil products, it would not only complete the separation of oil pricing from politics but also sharply reduce the Central and State governments' fiscal deficits.

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Section  : Business
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