Before 2014, petroleum and oil sector finances were dangerously unsustainable. Subsidies were paid with oil bonds that were kept off the books. This artificially kept the fiscal deficit optics manageable and postponed due payments to the future. Oil Marketing Companies (OMCs) suffered massive losses as they were not able to cover their operational expenses and had to partially carry the burden of fuel subsidy.
So, OMCs’ profits were more often than not negatively impacted. They did not have enough funds for capital expenditure due to reduced revenues. The deregulation of diesel in October 2014 was a landmark step that went a long way in addressing the systemic defects plaguing the sector.
GoI also raised duties on petroleum fuel at the time of a global slump in crude prices. As a result, it could stock up public coffers without impacting the common man’s budget. As a consequence of these reforms, the petroleum sector’s contribution to the central exchequer almost doubled from Rs 172,066 crore in 2014-15 to Rs 334,534 crore in 2016-17.
So how is GoI utilising the additional funds it earned? Simply put, this increased income has given GoI much needed fiscal space to increase spending on critical initiatives in infrastructure and social development sectors. In 2014-2017 about 120,000 km of rural roads were constructed.
That’s a 50% increase in rural road construction from the 81,000 km constructed in 2011-2014. Also, in 2004-2014, about Rs 32,700 crore worth investments were approved in the affordable housing sector. In 2014-2017 that figure has increased to Rs 96,300 crore.
Spending on railways has also seen a significant climb. In 2011-2014, capital investment in railways amounted to Rs 46,000 crore. In 2014-2017, capital investments made have been worth almost Rs 88,000 crore.
Macro-economic indicators have also witnessed stability and positive trends. Fiscal deficit (FD) as a percentage of GDP has seen a steady decline starting 2014. FD, which was at an alarming 5.7% of GDP in 2011-12, is now at a comfortable 3.2%. Inflation has also cooled down from the double-digit bracket it had touched a few years ago.
To be fair, this improvement in the fiscal situation can’t all be attributed to petro reforms. However, the additional revenue mopped up through fuel duties has gone a long way in helping GoI dedicate much-needed funds. The Centre doesn’t even get all the additional funds — 42% of this revenue is shared with the states, which invest according to their development priorities.
Fuel prices are as much a function of external factors as of internal policies. India imports more than 80% of its oil requirements, and petrol and diesel prices are directly linked to global price movements.
Unfortunately, global prices have spiked in recent weeks due to geo-political incidences. Consequently, global crude prices have gone up by 13%, petrol by 18% and diesel by 20% in July-September. We must not forget that not too long ago, years of good politics and bad economics almost led us to the brink of bankruptcy. So, for long-term economic stability, fiscal prudence has to be the backbone of most policy decisions.
Source: economictimes.indiatimes.com