Government looking to formulate ‘long term’ solution for surging fuel prices

New Delhi, May 24: The government is working on a “long-term solution” to deal with volatility in global crude prices and frequent revisions in retail rates of petrol and diesel, law and IT minister Ravi Shankar Prasad said after the Cabinet’s meeting without outlining the options being considered.
“The government is keen that instead of having an ad hoc measure it may be desirable to have a long-term view which addresses not only the volatility but also takes care of the unnecessary ambiguity arising out of frequent ups and downs,” he told a news conference.
It seems the government wants to wait and watch the oil prices some more. But if projections by various investment banks and trade analysts are anything to go by, it may have no other option but to cut excise duty.
Other options such as changing the pricing formula to revise customs duty on petrol and diesel, even though they are not imported, at best will be the topping. Dumping daily revisions will bring the government’s reforms agenda into question.
India is particularly at risk from stronger global prices for crude oil as it is the third-highest importer of the commodity buying about 80 per cent of its oil needs.
M K Surana, chairman of state-run fuel retailer and refiner Hindustan Petroleum Corporation, said the government should review taxation of petrol and diesel to provide relief to the customer.
He said going back to a costplus method of calculating prices against the current system of pricing fuel daily at a 15-day moving average of benchmark product prices would be a retrograde move. “The long-term solution is bringing petroleum products under the GST regime,” he added.
Oil minister Dharmendra Pradhan has been blaming “the unilateral OPEC decision to cut production, fall in Venezuela’s output due to political instability and the prospect of US sanctions against Iran” for runaway pump prices. No doubt, these factors have pushed up benchmark crude prices to $80/barrel and the impact has been amplified by a falling rupee.
Rising pump prices are already adding to inflationary pressure and are strengthening the case for a rate hike.
The Economic Survey, issued by the finance ministry at the end of January, estimated a $10 per barrel rise in global oil prices reduced growth by 0.2-0.3 percentage points, increased wholesale price inflation by about 1.7 percentage points and worsens the current account deficit by about $9-10 billion.