New Delhi: With the Budget restoring and increasing taxes on crude oil and petroleum products, the government has decided to pass on the increase in fuel prices to the consumers, a move that will lead to prices of several products and services rising in the immediate future.
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The announcement to this effect was met with howls of protest from the opposition parties, which staged a walkout—the first during a budget’s presentation.
Effective midnight Friday, the price of petrol, which the government artificially keeps at levels unrelated to global market prices of the fuel, was raised by Rs2.71 a litre, and that of diesel, by Rs2.55 a litre. The effective rates for consumers will vary depending on the local taxes. In New Delhi, for instance, petrol and diesel will be priced at Rs47.43 per litre and Rs35.47 per litre, respectively.
Photo: Ramesh Pathania/Mint
The price rise is on account of a 5% customs duty on crude oil and a 7.5% duty on diesel and petrol in the Union Budget. Presently, crude oil attracts no such duty, with diesel and petrol attracting a 2.5% levy. The duties on other refined products have been doubled to 10%, with a Re1 increase in the Central excise duty on petrol and diesel. Petrol and diesel attract an excise duty of Rs13.35 per litre and Rs3.60 per litre, respectively.
According to Kaushik Basu, chief economic adviser, the move to hike indirect taxes on petroleum and other products too is not inflationary. “It’s a one-step increase,” he said at a press conference.
Still, the impact of an increase in indirect taxes on prices will add 0.43% on the Wholesale Price Index. However, it will compress fiscal deficit, which also feeds into inflation, Basu argued. In the long run, the increase in prices would be balanced by a fall in fiscal deficit, he reasoned. “Accordingly, the impact of this (increase in duties) on oil marketing companies (OMCs) would increase and they are not in a position to absorb this. The ministry of petroleum and natural gas has directed the OMCs to increase the prices,” petroleum secretary S. Sundareshan said after the Budget.
OMCs such as Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd that operate almost 95% of petrol and diesel retail outlets across the country are expected to end the current fiscal year with losses of around Rs43,000 crore on account of not being allowed to charge market prices for fuel.
The 13th Finance Commission, which presented its report on Thursday, had also argued for a reduction in fiscal deficit as it would create space for higher growth.
While the Congress is backing the move, the main Opposition party, the Bharatiya Janata Party (BJP), called it a “crushing blow to the weak and voiceless—the proverbial aam aadmi”. “The increase in petroleum product prices, including diesel, will have a massive cascading effect on all prices,” said senior BJP leader and former FM Yashwant Sinha.
Interestingly, the Budget documents show that the finance minister hopes to reduce the oil subsidy bill that it incurs by subsidizing OMCs for their losses from Rs14,954 crore in 2009-10 to Rs3,108 crore in 2010-11. That could mean that Friday’s price rise might not be the last this year.
Santosh K. Joy contributed to this story.