No Roll Back Please !

The government has bitten the bitter pill by making a politically unpopular decision of increasing the basic customs duty on crude petroleum by 5 % and hiking the excise duty on petrol and diesel by Rs1/Litre. This triggered an immediate backlash not only from the opposition (who for the first time in India’s parliamentary history staged a walkout midway of a budget session) but also from its coalition partners like Trinamool Congress and DMK who have state elections to face next year. Mr Mukherjee needs commendation for standing firm on his proposal and not relenting to the mounting political pressure to roll back the petroleum price hike.

Critics of this proposal cite that the cascading effect of this petroleum price hike will be felt in many quarters of the economy including agriculture. Now let us objectively understand the dynamics.

Firstly, the finance minister proposes to accommodate petroleum subsidies into the budget and not muffle the same as an off-budget guarantee like his predecessors. This is a welcome measure which would significantly improve the accountability of these politically sensitive subsidies. However, accommodation of such subsidies into the budget would imply cash payments to downstream oil companies. Where can the government accommodate this cash payment? Especially at a juncture where fiscal consolidation is a must, the government cannot afford to finance this payment through borrowings. If in case, this money is raised through market borrowings, it will definitely drive out a segment of private investment and inflate the general interest rates which will again affect the public at large.

Now by proposing to finance the cash subsidy through a hike in customs and excise levy, the government is attempting to fund petroleum subsidies by not disturbing the cost of private investment. Moreover, this is the best time to tax petroleum products and retain the surplus (if any) to cushion any volatile upswings. Mr Mukherjee can also consider utilizing the money earned from these levies for incentivizing research in renewable energy sources.