Circuit breaker on duties

While the continuing hardening of global oil prices has ominous portents for inflation, the oil marketing companies are enjoying the good times. But the government too is laughing all the way to the bank. On average, given that the government collects Rs 20 or so for every litre of petrol that costs Rs 16–17 per litre, it stands to gain hugely from each dollar hike in global prices—one estimate puts the increased revenue from each dollar price hike at around Rs 1,600–1,700 crore, half of which comes from increased corporate taxes paid by the oil companies and the other half from increased excise and customs collections.

Since the government’s intention clearly cannot be to fuel the fires of inflation or make life more difficult for ordinary people, who have to bear the brunt of the fuel price hikes, there is a good case for adjusting both excise and customs duties on crude and petroleum products.

While such a decision may well get taken over the next few days, given the government’s avowed focus on the “aam aadmi”, what’s needed is a self-starting mechanism that adjusts the ad valorem import duty levels once global prices reach a cut-off level, whatever that level may be. In the case of crude, for instance, it could be $35 per barrel, or any figure which gives the government some revenue buoyancy without making the “aam aadmi” feel exploited.

Such a mechanism is particularly important in the context of the overall inflation picture; some of the price increases announced recently have yet to be captured in the wholesale price indices that have been released.

And bear in mind that increases in fuel prices will over time reflect in higher prices for everything from vegetables to steel. So while the finance ministry hopes that the inflation rate will blip back down very quickly, the inflation rate is not likely to come back to the 5 per cent range in a hurry. Hence the need for moderation of windfall tax gains for the government.

Equally, when commodity prices are high, there can be no defence for import duties of 65–100 per cent in the case of items like edible oils and sugar, whose prices have gone up significantly as well. The traditional justification for such huge duty levels is that local farmers will be hit if import duties are low enough to allow cheap imports to flood the markets.

But if the landed value for imports is worked out at which local farmers are protected, surely import duties can be allowed to fall once they move above this baseline number.

It doesn’t help that electoral considerations in Maharashtra are being seen as the main reason behind the government’s move to cut the free sale quota of sugar from 13 lakh tonnes in July to 10 lakh tonnes in August—this move, in the beginning of the month, sent sugar prices spiralling in most markets in the country. The BJP lost the elections in Delhi over the steep hike in onion prices in 1998—surely there’s a lesson to be drawn from this.