*By Sreekumar Raghavan* Most of us who are struggling with high food inflation and rising standard of living heaved a sigh of relief when government postponed the decision to raise fuel prices as coalition partners in the UPA government opposed the move. India's largest oil retailer, Indian Oil Corporation, however, is hopeful that an oil decontrol regime would be in place soon and prices would not be administered by the government but by the prevailing prices of crude oil.
It goes without saying that any hike in fuel prices will have an inflationary impact on the economy but at the same time it seems strange how a public sector enterprise is allowed to incur a loss of Rs 1 bn every day. But, before we dismiss such figures as wild, it is also a fact that we don't have an oil regulatory commission like we have for electricity or insurance. Recently, the State Electricity Regulatory Commission dismissed the accounts and figures submitted by Kerala State Electricity Board for raising power tariff arguing that they were misleading and quoted out of context and consumers again heaved a sigh of relief as they put they further reduced their air conditioner temperatures to beat the summer heat. So let us not take Indian Oil Chairman's Rs 1 bn loss at face value but they do incur losses and government does come out with oil bonds to help them. It is a fact that when ever crude prices turn volatile, Indian consumers are faced with the harsh reality of rising petrol, diesel prices and consequent inflation. But, so far the government has not shown any innovativeness in bridging the oil deficit. In 2005-06, India introduced the education cess of 2% on outstanding tax amount and a further 1 percent higher education tax. I read a news report that this was a huge success--the Parliament was informed after the first year that over Rs 10,000 crore was collected by way of educational cess and this could have reached Rs 40,000 cr by now. Some states like Kerala introduced road cess from 2008 onwards whereby a one-time fee was collected along with registration of new vehicles which ranged from Rs 50 for two-wheelers to Rs 250 for heavy motor vehicles. It was intended to create a corpus to improve road conditions to ensure safety for vehicles and passengers. The government needs to think of innovative ways to fund the oil pool deficit rather than hiking rates under a decontrolled mechanism when the country is used for years to the Administered Pricing Mechanism for all kinds of fossil fuels. A direct increase in petrol, diesel, CNG prices may have an immediate inflationary impact on the economy and it could also not go well with the electorate. The other option to reduce sales tax on fuel is also not favoured because state governments stand to lose tax revenue while the ‘oil cess’ strategy is revenue generating exercise with an intended purpose of bridging the oil pool deficit. An oil cess would work the same way as the educational cess, any one who consumes a taxable commodity would be contributing to it., but this may require legislative sanction. For those categories of goods that can be termed, luxury or premium, the rate of cess can be raised accordingly- for eg. Rs 6 lakh plus car, luxury flats, expensive toys, clothes, stay in business class hotels among others. It’s impact is unlikely to be inflationary as prices are not going to shoot and the burden is more or less distributed evenly. The sale of items through public distribution system and to the poor and need can be exempted from such cess. -- Regards Hardik Shah -- You received this message because you are subscribed to the Google Groups ""GLOBAL SPECULATORS"" group. To post to this group, send email to [email protected]. To unsubscribe from this group, send email to [email protected]. For more options, visit this group at http://groups.google.com/group/globalspeculators?hl=en.
