Not sweet crude

It is true that excise duties on petrol have been cut from 23 per cent to 8 per cent, but this has been more than made up by the new impost of Rs 5 per litre on petrol. All told, even after allowing for the lowered import duty on crude oil, the duties payable on petrol have gone up by around Rs 2 per litre, if you include the increased road cess.

The new Rs 1.25 duty on diesel, along with the higher road cess, has a similar impact on diesel.

Petroleum Minister Mani Shankar Aiyar’s statements, however, make it clear just what the finance minister had in mind – Mr Aiyar has said that what are said to be ‘revenue neutral’ duty changes are ‘not neutral’ as far as the oil public sector enterprises are concerned, but that he would not allow them to hike prices.

In other words, the Budget has resulted in an increased burden for the oil PSEs, who will now have to bear more subsidy losses. One end result could be that, as in the current year, they pay lower corporate taxes to Mr Chidambaram’s revenue officials.

While the Budget proposal to eliminate the import and excise duties on LPG and PDS kerosene is certain to go down well with the consuming public, this introduces new distortions in the relative pricing structure of the industry since there is now negative protection for those producing these two products -- the crude oil input attracts an import duty of five per cent while the final product has no duty.

In a normal free market situation where producers can take their own decisions (as the oil PSEs theoretically can), such a duty change would provoke a switch in production patterns.

While the nature of production requires that certain levels of LPG and kerosene have to be produced, producers would normally reduce the production of kerosene and make more of aviation turbine fuel, diesel and naphtha.

But since the oil PSEs are not free to do what they want, there is little fear of this happening, though a free agent like Reliance may well lower production of these two fuels.

Apart from the fact that the new duty structure (5 per cent on crude and 10 per cent on products like diesel and petrol) still translates into an unacceptably high 30 per cent effective protection for the refining sector, what’s curious is that there are lower duties on aviation fuel today than on diesel -- while there’s a 10 per cent import duty on both, and a similar 8 per cent excise, diesel users have to pay an additional Rs 1.25 per litre as a specific excise duty and Rs 2 per litre as the road cess.

Presumably the Left parties will have something to say about this.