Brent at $80/barrel is only making analysts revise their price target for crude oil upwards. With oil markets bracing themselves for a drought of Iran oil by November, Indian policymakers are tight-lipped about their contingency plan. The issue is not only about replacing the lost Iranian barrels, but also about India’s policy response to the rising resentment among consumers. But people queuing up at the pump are least interested if we are engaging with OPEC to hike output or negotiating with the US to relax Iran sanctions. Pressure is building upon the Centre as well as the states to cut taxes.
So far, the Centre has resisted taking any knee-jerk action to pacify the consumers, though a few states have been cutting VAT. Consumer sentiment is valid when the government is questioned on its promise to cut excise duties. But the consumption pattern shows why the government was in a way right in not succumbing to popular pressure.
We are an oil-importing nation. So surging fuel consumption puts pressure on the current account deficit and in turn on the currency. India’s import dependency of crude rose to 82.2 per cent in fiscal year 2018 and in the current fiscal, it is estimated to import 227 million tonnes of crude oil. The crude import bill in FY18 was $88 billion and we have easily crossed the government estimate of $105 billion for the current fiscal. The government’s target was pegged at crude at an average of $65/barrel, and it is clearly not going to be so.
We used the fall in global crude oil prices to implement free-market pricing for petrol and diesel. It does not make sense to go back to the under-recovery model of subsidies followed earlier. The best way forward could be to bring transportation fuel under GST. Nevertheless, any visible impact on pump prices attempted with tax cuts would be possible only when the crude prices stabilise. Cutting taxes while global prices are on the rise would nullify impact at the consumer level, and would also impact government finances.