Custom-made concerns

Custom-made concerns
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First Published: Sun, May 25 2008. 11 50 PM IST
Updated: Sun, May 25 2008. 11 50 PM IST
My niece Nithya, who is studying law in Mumbai, told me last week that though people had asked her to read my column, she found it difficult to understand. I promised to try to be simpler, for the Nithyas are the future of the country, not the bureaucrats or the economists, and they must be able to assess for themselves the rights and wrongs of events.
I find that I look at contemporary economic events with a tinge of anxiety, out of concern that things should turn out right, and do try to make some suggestions for improvement. There are two important recent developments, and both need to be looked at from this point of view.
The first, of course, is the price of oil. We import 75% of our needs and with the price of oil having crossed $130 per barrel, we will be spending nearly Rs200,000 crore on oil imports alone. The demand for dollars to buy oil has been weakening the rupee against the dollar, and our trade deficit is increasing, with imports far exceeding exports. With substantial foreign currency reserves, this is of little concern in the short run, but it’s not sustainable unless there are huge capital inflows in the form of investments from abroad. Further, this price of oil should translate, if we include all the taxes, into a price close to Rs100 per litre of petrol, and we are paying far less.
The difference is being borne by the public sector oil companies and by the government, which is guaranteeing bonds issued by the oil companies in the market. The losses of the public sector oil companies will exceed Rs50,000 crore on account of this and they are finding it difficult to manage their working capital needs. Added to all this is the peculiar fact that there is a shortage in the production of LPG and diesel, for the private sector refineries are exporting products at high prices while the public sector companies have to supply to local markets.
There is need for an increase in prices of petrol, diesel, etc., and we should agree it is long overdue and must happen. There is strong argument for a petrol price increase of Rs10 per litre and we should be ready for it. It is important to keep LPG and kerosene subsidized, though with some upward revision in prices. The use of diesel to generate power to run commercial shops and air conditioners should be strongly discouraged—it should be used only for transportation. Some price increases are warranted here, but more seriously, a close watch on who is using diesel generators and why.
At the same time, there is need to dismantle the complicated tariff structure that petroleum products face. Central excise duties and state sales taxes should be reduced — if done carefully, the loss in revenues would be partially compensated by the rise in prices.
On customs duties, it is time to do away with them altogether. The option that the government is toying with, of reducing customs duties on crude to zero, will benefit all refiners, especially the private sector, and do little to the pricing. It is important to reduce product customs duties to zero. Finally, it is important to conserve energy — to use private vehicles for multitasking, to conserve use of LPG, power, etc. We all need to put our shoulders to the wheel.
The second development is the finance minister’s announcement of the details of the loan-waiver scheme for farmers. Simply put, it attempts to write off all the short-term crop loans of small and marginal agriculturists. The cost of the scheme exceeds Rs70,000 crore. Banks have been asked to write these debts off their books on a stipulated date.
There are two worries. First, for the farmers who have had poor crops, it is a relief, but leaves them no better off in terms of working capital for the next season. For those who have had a good crop and have been able to sell it in the market, it is a boon since it provides them a revenue flow which, if carefully used, can purchase inputs for the next agricultural season. Since there are more of the former than the latter, the benefits are short term.
The second worry is from the point of view of the banks. If they write off the dues from their books, they have lost the principal as well as the interest and are, therefore, poorer. Is the government going to compensate them, and if so, from where? If it is from the budget, that means additional borrowings from the market, and indeed, from banks whose liquidity has already been squeezed. One can thus expect a rise in interest rates of government borrowings, especially state government borrowings and oil bonds, making the costs of the borrowings higher. For states, the future appears to be again one of fiscal stress. For the Centre, there is a huge fiscal bill waiting to be paid by the finance minister in the new government next year.
However, if one looks at it, this is a short-term measure that will yield little long-term benefits. We will look at options next time.
S. Narayan is a former finance secretary and economic adviser to the prime minister. We welcome your comments at
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First Published: Sun, May 25 2008. 11 50 PM IST
More Topics: Oil | Petrol | Diesel | LPG | Columnist |