FM Sizes Up Balancing Act On Oil .

New Delhi, Feb. 13: Finance minister Pranab Mukherjee has a range of options on inflation at a time global crude prices are on the boil.

Analysts said Mukherjee could tweak duties and partially hike government subsidy to keep prices under check and help the balance sheets of oil companies.

Global crude prices have risen to over $100 a barrel and are expected to increase with the recent success of the movement against Hosni Mubarak in Egypt. Prices can also rise if the movement spreads to other parts of the Arab world.

India imports 80 per cent of its crude oil requirements, a major part of which comes from West Asia.

The widening gap between domestic retail price and the cost of production will necessitate action from the finance minister — the options before him are to increase fuel prices, raise the subsidy and change the levies; or a combination of all.

Mukherjee has indicated that high crude rates will not be passed on to the common man, already reeling under the price rise.

When crude prices had touched a record $147 per barrel in July 2008, “at that time also, we had to manage the situation. The government will take care of it now”, the finance minister said.

Though Mukherjee did not divulge his plan, he could either provide higher subsidy to compensate oil companies for selling fuel below cost or lower duties to protect the consumer. The measures, which could also be a mix of the two, are expected to be announced in the budget.

The option of raising fuel prices may not be easy at a time the government is struggling to calm inflation, which rose to 8.43 per cent in December 2010 from 7.48 per cent a month ago.

The Reserve Bank of India has raised its March-end inflation estimate to 7 per cent from 5.5 per cent.

At the same time, higher subsidy to oil marketing companies would be against fiscal prudence.

During 2010-11, the government earned a substantial revenue from the 3G auction to keep the fiscal deficit at the budgeted level 5.5 per cent of the gross domestic product (GDP).

However, it will be hard for the government to maintain a rigid discipline — high inflation and uneven global economic recovery will make it difficult for it to follow the 13th Finance Commission’s road map of fiscal consolidation and keep the deficit at 4.8 per cent of GDP in 2011-2012.

Analysts said the government could reduce customs and excise duties to lessen the burden of oil firms, which are facing huge revenue losses.

The oil ministry has urged the finance minister to roll back customs duty on crude to nil from 5 per cent and reduce those on petrol and diesel to 2.5 per cent from 7.5 per cent — these levies were tweaked in last year’s budget.

For the first six months of the fiscal, the finance ministry had approved Rs 13,000 crore as subsidy. It has given another Rs 8,000 crore recently, taking the total subsidy for this financial year is Rs 21,000 crore.

Changes in the duty structure will help the government to reduce the amount of subsidy given to oil firms.

The abolition of customs duty on crude oil “would reduce diesel under-recovery by Rs 1.48 per litre,” according to Petrofed, an oil and gas industry association. This means subsidy to state fuel retailer may fall.

Source : telegraphindia.com