Credible Compromise
convergence of political opinion on the matter is more than welcome.
In the interim, import duties on crude and petroleum products are to be lowered from the next year onwards. This provides a cushion for subsequent hikes in petro prices in order to align them closer to the true, landed price. Thus, the twin track approach of cutting back duties at the same time as effecting a nominal price hike should arrest the growth in the deficit. The time for a change over is ripe as international crude prices are currently ruling at two year low as $17 per barrel.
For this year, a modest hike in prices of petrol and diesel is being considered, the impact of which on the accumulated deficit is not expected to be more than Rs 2,100 crore. Inflation is currently ruling low at around 6 per cent and a nominal hike is unlikely to trigger off a cost push spiral. More importantly, inflationary expectations as compared against the cost push of a hike will be subdued if the government commits itself to a timetable on dismantling the APM.
Indeed, a definitive move to exempt new capacities coming up in the sector from the APM from day one itself should reinforce the publics confidence in the governments resolve. In the transitional period, this will mean a twin pricing system which has been successfully tried out earlier in the gradual decontrol of the steel and cement industries. But given the fact that only Indian Oils Panipat refinery is coming up in the next 12 months the gains are most likely to be psychological. All other fresh capacities Reliance, Essar, Mangalore Refineries are to come on stream well beyond 1999 and will compete in the open market.
Profits of the oil companies are expected to jump a clear 100 per cent, but that is only after the APM is abolished completely. A special levy in the nature of a windfall tax may not be a bad move in the current situation though, in principle, it may amount to government extracting a price for reform. The point remains that having borne with the politicisation of the oil pricing system for eternity, a couple of years more of taxes should not make much difference.