Saturday, May 12, 2012

More subsidies on petrol may be in the offing

If the current demand of oil marketing companies is anything to go by, the Indian government would again find itself at the same old crossroads. They would be facing the perennial dilemma of choosing between inflations and fiscal deficit. Actually, as per the government-owned oil companies, they are losing over Rs 7 per litre on sale of petrol. And they want the government to compensate for the same. True, petrol price is already de-controlled. However, petrol price hardly moved in tandem with the crude price. With the increase of crude price in the last five months, no revision in the petrol price has added losses to the oil marketing companies.

There are many options in front of the Indian government. Keeping inflation in mind, for the time being, the government can declare petrol as a regulated product. And compensate the companies for their losses. This would add to the expenditure of the government. Else, it can reduce the excise duty on petrol to compensate for the losses. In this case, the government would be losing on its revenue collection. Hence, both ways, fiscal deficit would come under pressure. And if, the government decides to go with the hike in petrol prices, inflation may again go out of the roof. What path will the government choose? We have to wait and find out. However, more financial pain seems to be in the offing.

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