Relevance: Mains: G.S paper III: Economy
Context:
- That windfall could come under threat if crude prices go up with increased US-Iran geopolitical tensions and the Modi government — unwisely, if at all — cuts duties or forces oil companies to absorb part of the burden.
Evolving the uncertainty:
- Heightened uncertainty in West Asia following the US airstrike killing Iran’s top military commander has thrown the spotlight again on oil.
• In the last three months, Brent crude prices have risen from about $ 58 to almost $ 69 per barrel.
• US and Russia have displaced Saudi Arabia as the world’s largest crude producers today, with the former’s output especially more than doubling from roughly 5.5 million to 12.9 million barrels per day in the last decade.
• As a result, the Persian Gulf region’s control over global supplies isn’t as much as during the 2003 or 1991 Iraq War.
• But that’s hardly any consolation for India, which cannot, for purely geographical reasons, source crude beyond a point from the likes of the US, Venezuela and Russia.
• The Narendra Modi government’s first term was marked by falling international oil prices.
• It did not, wisely, pass these on fully to consumers and, instead, netted a yearly revenue windfall of some Rs 150,000 crore by raising excise duties on petrol and diesel.
Effects from this windfall:
- That windfall could come under threat if crude prices go up with increased US-Iran geopolitical tensions and the Modi government unwisely, if at all cuts duties or forces oil companies to absorb part of the burden.
• Rising oil prices can also impact India’s balance of payments and the rupee (the domestic currency shed 44 paise against the dollar on Friday), further adding to inflationary pressures.
• There is a third component that contributed to benign inflation during the Modi government’s first term: Low food prices. Annual consumer food inflation crossed single digits in November, which was for the first time in nearly six years.
• Many commodities — from onion, potato, pulses, and milk to maize and soyabean — have seen prices rising or at least correcting from lows.
• The reasons for it are partly weather-induced (excess rains during September-October) and partly structural (farmers reducing production in response to the earlier sustained low realizations). Either way, benign food, and fuel inflation can no longer be taken for granted.
• The return of inflation, on top of pressure on government revenues, leaves very little space for both monetary and fiscal policy.
• The focus has to necessarily shift to structural reforms that have been put off for too long.
• The existing system of open-ended procurement of wheat and paddy at minimum support prices has to go.
Conclusion:
- To must super-subsidized physical sales of grain or urea. These should be replaced by direct cash transfers targeting vulnerable consumers and smallholder farmers.
• The resources thus freed, along with those raised through privatization (inclusive of excess land parcels held by government departments/enterprises), can fund much-needed public investment without creating fiscal or inflationary pressures.