The Modi government's oil dilemma

The Modi government's oil dilemma

The problem, as the current set of ministers have found out, is that it is always easy to protest while in Opposition - but not so easy to take steps to cool prices when you are in the government.

PC: Reuters PC: Reuters

Petrol and diesel prices have been rising relentlessly and all the BJP luminaries who protested vociferously and wittily about oil prices in 2013-14 during the UPA rule are now silent. They are seeking to explain how it is not the government's fault because crude prices are rising while the rupee is falling against the dollar or how the increased excise duties on petrol and diesel are helping in social programmes and infrastructure development. The problem, as the current set of ministers have found out, is that it is always easy to protest while in Opposition - but not so easy to take steps to cool prices when you are in the government, especially as you have no control over global crude oil production and pricing. (Meanwhile, the Congress is having fun protesting against petrol price hikes now that they are in the Opposition.)

The question most people are asking is that if currently crude oil prices are at $80 or so, then why are retail petrol and diesel prices higher today than in 2013-14 when they were over $100? And why hasn't the central government that hiked excise on petrol and diesel multiple times as crude oil prices were falling now reducing it when crude prices have shot up? And why aren't state governments, which charge a hefty VAT on petrol and diesel, reducing the tax a bit at their end to keep the consumers happy especially as diesel price hikes will also show up in inflation, both in WPI and CPI?

The issue is that both the central government and the state governments have found themselves in a bit of a trap.

First let's take the central government's dilemma. Crude oil prices are going up because the OPEC led by Saudi Arabia wants to keep production low and prices high - and it has succeeded in its goal. The problems in the Middle East have further hit supplies and production. Shale oil production in the US has not ramped up to dampen prices either. So prices are rising and will probably keep rising for some time.

Now, India imports most of its crude, and any oil price will hit its budget and fiscal calculations. The Modi government was hoping that crude prices would stay below $70 and made its calculations accordingly. Now with oil prices going well over that, its calculations have gone awry. The excise duty hikes that it had implemented when crude prices were falling had helped it reduce fiscal deficit and fund many of its pet schemes. But if it cuts excise duties now, it will take a huge hit on revenues. It will be a triple whammy because it is paying more for crude imports, its tax revenues have not settled fully as yet because GST is still a work in progress, and its fiscal deficit will go over target if it does not get full revenues from excise duties on petrol and diesel. If it wants to keep its fiscal deficit in check while reducing excise on petrol and diesel, it will have to cut some of its welfare schemes - not a very good idea when it is preparing for a whole host of elections in major states as well as the next general elections.

So then, what about the states? Can't they cut their VAT by a bit? Well, many of the big BJP-governed states have waived off farm loans as a populist measure - the only problem is that it has increased their financial burden and they need to find a way to pay for that waiver. Reducing VAT at this moment would not be particularly good for their balance sheets, because state fiscal deficits have been rising for some time. Take Maharashtra for example, which has one of the highest state taxes on petrol and diesel. It has recently given a farm loan waiver to keep the farmer agitations at bay. It has therefore little leeway in reducing VAT on petrol and diesel.

It is not that the governments like high petrol and diesel prices any more than consumers. Angry consumers and higher inflation make for a discontent electorate. But then, they also have to manage their fiscal problems - and that is the main reason they are still trying to figure how to cut oil prices.