Missed opportunity for reforming petroleum pricing

The Budget stimulates growth and 9% is an achievable target if the rains are normal. It also facilitates growth and encourages private investors. The tax cuts provide substantial additional disposable income to the middle classes. This should increase domestic demand. The impact of this should more than compensate the reduction in fiscal stimulus. Also, the projected fiscal deficit to 5.5% is modest and for all these the finance minister should be congratulated.

There are some good measures to reform energy policy. What we had recommended in the integrated energy policy concerning coal sector are promised—a coal regulator and auctioning of coal block. However, the monopolistic power of coal India will continue.

The outlay for renewable energy of Rs 1,000 crore is welcome. It should give a boost to solar power, which is the most important sustainable energy source of the country. Yet, how this money is spent and how the subsidy is distributed will be critical in deciding if it stimulates development of solar technology or not. One can get solar power by giving subsidies and if it does not improve technology, then the subsidy given is more or less wasted.

But my big disappointment is with respect to the measures on petrol and diesel prices. The Budget has increased customs duty on crude and petroleum products to 5% and 7.5%, respectively. Also, excise on petrol and desire have been raised so that the price of petrol will rise by Rs 2.67 per litre and the price of diesel will rise by Rs 2.57 per litre. Yet, what is perplexing is that if the government is willing to take the political fallout of raising prices, why does it not free the prices and let them be market determined as recommended by the expert group on petroleum pricing?

Moving to market determined prices would not have raised diesel prices any more than what the Budget proposes and petrol prices could have been raised a bit more. The advantages of moving to a competitive market would have been many. It would have provided a sustainable energy policy when crude price on the world market fluctuates. If the world price increases to $90 a barrel, with the present policy the government would find itself facing the fiscal stress from large under-recoveries of public sector oil companies. We also forego the benefits of competition that the free market would have brought about. The burden of petrol price increase would have been meagre compared to large tax breaks given to the middle class.

I am also disappointed that a differential additional excise on diesel drive passenger cars was not levied, as suggested by our expert group.

The emphasis on reforming subsidies is welcome. A lot is expected of the Unique Identification System. However, UID will only provide a platform on which subsidy targeting scheme would have to be mounted. The UID will verify a person as the person one claims to be when one goes to a shop. However, if subsidised ration is to be given to a person, he would have to be identified as the deserving person and a smart card linked to his UID would have to be issued. Thus, if subsidies are to be effectively targeted, a lot of advance action needs to be taken now. I hope that the Budget provides for such action.

Source: Financial Express

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