Union budget 2010 � is the fuel price rise is the budget concern

"Daring Ideas are like chessmen moved forward.They may be beaten but they are enough to start the winning game"
–JOHANN WOLFGANG VON GOETHE(Germen Philosopher)

India has surpassed all expectations of the world and has emerged as a clear winner in the jeopardized economic environment which also shrouded the world for the last couple of years.It now enjoys the cherished feat of being the engine of the recovery mechanism of the 'economic slowdown' which hampered the growth of all major economy of the world. It was a serious impediment to India's growth story who was cruising at 9% growth rate for three consecutive years but due to the robust recovery module backed by bold and forthsight decision making by those in the higher echelons of the Government averted a major economic crisis that would have been an inevitable consequence of the meltdown. Even economic giants like the United States wilted under the inferno of this mammoth catastrophe.

Therefore I have no qualms in agreeing to the fact that the present fiscal and economic conditions are ideal to propose a hike in the excise duty of petrol and diesel. In the period of 2002-08, the international prices of the crude oil has increased many folds. This sharp increase has put enormous pressure in the Indian coffers. It has caused huge increase in the fiscal deficit which is a cause of worry for any peaking economy like India. In the backdrop due to the sharp increase in the international rates and to protect the domestic consumers, the government decided to modulate the prices of four sensitive products � petrol, diesel, PDS kerosene and domestic LPG, and compensated oil marketing companies (OMCs) for their under-recoveries partially through subsidies. This not only led to a burgeoning subsidy bill, but also losses for OMCs. Under-recoveries of OMCs were to the tune of Rs 103,292 crores in 2008-09 .

A year ago it was much lesser to be specific Rs 77,123 cr. A collosal increase in the under recoveries was a whole two per cent of the gross domestic product (GDP). The government allocated oil bonds worth Rs 75,942 crores in 2008-09 to partly compensate the OMCs. Though these bonds are not included in reporting fiscal deficit, it was not feasible to sustain the existing mechanism for long.It was a makeshift arrangement as a part of a goodwill gesture to stimulate the recovery of the comapany.Therefore the increase in the oil prices was an inevitable and a neccessary evil which will no doubt have a daunting impact in the budget of a common man but will prevent the collapse of the Oil Industry in the long run.Consequently Petrol and diesel prices will went up by Rs 2.67 a litre and Rs 2.58 per litre, respectively.

The government raised customs and excise duties on the two.Customs duty on petrol and diesel were hiked to 7.5 per cent from 2.5 per cent while excise duty was raised by Re one a litre to Rs 14.35 and Rs 4.60 per litre on non-branded (normal) petrol and diesel respectively. This would lead to increased receipts of approximately Rs 26,000 crores to the Centre. In the current scenario, where fiscal deficit has reached 6.8 per cent of GDP, this move is appropriate.

In order to strike a balance between managing inflation, sustaining growth, and curbing fiscal deficit this prudency was required on the part of the government.A rationale analysis will definitely bring forth the conclusion that the step was extremely neccessary.Also one should not miscontrue that the Government is totally apathetic towards their fellow citizens.As regard to the burden of higher fuel prices on the common man, the Budget has provided relief in direct taxes that translates to a maximum tax savings of Rs 51,500. In addition, through the National Rural Employment Guarantee Scheme (NREGS), the government provides employment and thus income to the poorest in rural areas. The Budget has allocated Rs 40,100 crores for NREGS for 2010-11. NREGS is estimated to cover more than four crore households.NAREGA has been a watershed and a blessing in disguise for the millions of underprivileged countrymen whose basic right to work had been encroached by the high and mighty for decades.It goes on to show that government is not turning a blind eye to its fellow countrymen.

The inflationary impact of higher fuel prices needs to be seen in the light of economic growth. The rise in the level of prices of fuel prices would add 40 basis points to the inflation. Given the economy resuming its buoyancy, this can well be absorbed. GDP growth for 2009-10 is estimated at 7.2 per cent and the Union Budget has projected GDP to grow by 8.5 per cent in 2010-11. In such a healthy growth scenario, the economy can afford to take some burden of higher fuel prices that reduces the fiscal deficit, the benefit of which would flow back to the economy.Thus the net gain would be of our economy in the long run.

The need to address the spiralling fiscal deficit situation, and the need to control subsidies, as they lead to an inefficient allocation of resources was a must at this juncture of our economic trajectory.Having said that I would also like to see dependency on fossil fuels being reduced in the future and an increased dependency on the renewable sources of energy like the sun,wind,ocean et -cetera.

The rise in demand of oil in both China and India has changed the oil demand scene in the global market. The Govt.of these countries has to cope with this change in social and economic status.Therfore this basically triggers the demand-supply disproportion which has to be dealth by our governments. In this regard even our Prime Minister has made a comment that the consumers cannot be fully insulated from the impact of rising global demand of oil and hence the consequent increase in prices.

With the surge in global oil prices leaving a Rs 2,25,040 crore revenue deficit with oil companies the government had no option but to go in for an increase, though consensus has elluded the government with protests coming from different quarters namely the opposition parties and even from within their own coalition partners such as the DMK and the TMC have vociferously demanded for a roll out of the oil prices.

But one should understand by the aforementioned arguments that the rise in fuel prices would stoke inflation by about 0.41% in the short-term but will go a long way in reducing the fiscal deficit which is absolutely necessary if India has to match up to the might of its immediate competitor China and other emerging victorious!

By

Rishabh Singh