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Will petrol prices, rupee hit the century mark?

Author: Kingshuk Nag/Wednesday, September 12, 2018/Categories: Currency, Oil & Gas, Expert View

Will petrol prices, rupee hit the century mark?

There is a joke doing the round on the internet these days: Which will hit a century first, the rupee or petrol prices? Joke, it might be, but the trends are ominous for the economy – what with a falling rupee and rising petrol prices, both of which are linked. The rupee is on the downslide and perhaps for the first time ever slid down below the Rs 70 to an US dollar mark in the first week of September. On September 6, it crashed below Rs 72 to a dollar, making it the lowest ebb ever reached by the rupee. It ended at a life-low of 72.45 against the US dollar on September 10. The trends are ominous because the Indian economy has been caught in a vice grip. A State Bank of India (SBI) report, released last week, suggests that the rupee will continue to face pressure in the near future. Since the rupee has been hammered due to external factors, the unfortunate fact is that the Indian policy makers can only take a few defensive measures. The government cannot be really expected to be successful in reversing the trend- whatever be its intentions.

It’s early days still, but the first impact of the falling rupee will be to increase the oil import bill. About 80 per cent of India’s petroleum needs are imported. Best efforts, over the years, to discover more oil in India has proven to be a failure. This means that the foreign exchange needs for petroleum import will increase quite sharply. Import bill for many commodities whose demand is ‘inelastic’ (which means that they are in the nature of necessities and their demand will reduce less proportionately than the price increase) will rise. In 2016-17, India imported 213.93 million tonnes of crude oil paying 70.196 billion US dollars, or Rs 4.7 lakh crore, for the same. The bill increased sharply to 87.725 billion US dollars (Rs 5.65 lakh crore) in 2017-18. For the present financial year 2018-19, the burden can only be higher.   

There is a way out for India. That is to increase its imports from Iran. Besides being in the neighborhood of India, Iran is part of the Organisation of Oil Exporters (OPEC) but it offers cheaper oil to India with whom the Persian country has good relations. The problem is that the global boss – the USA — does not want any country to import from Iran on whom it has imposed sanctions. India has not fully paid heed to the US warnings and is playing a blow hot blow cold policy. In July, India increased oil imports from Iran to more than the normal level only to reduce it sharply the next month. Iran has also offered India good discounts for its oil purchases. In the game of international diplomacy, the US has not pushed India very hard. This is because it realises that squeezing India is not a great idea. For one, India’s relation with the US is far better than before. Secondly, only India can be used by the US to be a counterweight to China which has emerged as a countervailing power to America. India along with the US and China are the largest importer of crude in the world.

Meanwhile, the global oil prices are on the upward trend. On September 7, oil prices shot up to $76.29 per barrel. This was a massive increase on $51 per barrel on September 1, 2017. However, in May this year crude oil had shot up to $80 per barrel. A one dollar increase in international oil prices impacts India’s import bill by Rs 823 crore. Analysts aver that international oil prices will shoot up to $100 per barrel in the next few months.

Although there is no immediate threat of global recession, rising oil prices will lead to demand recession for consumer and other goods. Finding his take home income under squeeze because of increasing prices – a fall out of increasing oil prices- the consumer will have less to spend for consumer goods. This can lead to a slow down and bring in a demand cut back at the best and recession in an extreme case.

Of course as oil prices rise, shale oil production by the US will rise. Analysts suggest that at $80 per barrel, shale oil production (which has a higher cost) will become profitable. Thus, there will be a rise in shale oil production.

Back home, protesting against the rising prices of petrol and diesel, the Congress called for a Bharat Bandh on September 10. Many opposition parties joined the call for bandh, which remained largely “peaceful”.

It is interesting to note that in India the high prices of petrol, diesel and other oil products is partly due to high domestic taxes. Although GST was introduced in India, oil products were kept out of its purview. GST, at best would be 28 per cent and possibly lower. But in effect the consumer is paying much through taxes on petrol and petroleum products. So part of the higher prices that the consumer is paying for higher prices of petrol, diesel or LPG is going into the coffers of the government – both the central and the state governments. The taxes are ad valorem (percentage of the prices) and this means that every bit of increase in oil prices results in higher imposition of taxes. Since the higher taxes lines the pockets of the state and central governments, political parties in power were silent when GST was being discussed to be introduced. However, now with elections fast approaching governments are having second thoughts. On September 9, the Rajasthan government cut VAT on both diesel and petrol by 4 per cent. Taxes on petrol will be reduced to 26 per cent from 30 per cent and diesel from 22 per cent to 18 per cent as a result of this move. The loss to the exchequer of the Rajasthan government will be to the tune of Rs 2,000 crore. Rajasthan is slated to go for elections later this year.

On the heels of the VAT cut by Rajasthan, another poll-bound state Andhra Pradesh announced a Rs 2 cut in VAT on petrol and diesel on September 10.

Excise taxes (centrally levied) and value added taxes (VAT) comprise the major imposition on petrol and diesel. While excise duty is uniform across the country, VAT varies from state to state. It is the lowest in Andaman & Nicober Island at 6 per cent and the highest at 39.12 per cent in Mumbai (Maharashtra). Thus the prices of petrol and diesel vary across different parts of India. It is to be seen whether in the election season, both the Union and state governments will be motivated to reduce the duties. Perhaps a GST regime would be the best, although the consumer will continue to groan.  

Kingshuk Nag is the author of several best-selling non-fiction books and former Resident Editor of Times of India

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