India, in common with other oil-importing nations of the world, has seen and weathered quite a few oil shocks since the eighties. But the latest one the country is going through is unique.
The current crisis is of the country's own making, with international crude prices remaining placid and almost stable for the last one year; in fact, the prices have registered a marginal decline.
The relentlessly depreciating rupee vis-à-vis the dollar is alone responsible for the numerous increases in petrol prices during the last one year. Indeed, Indian Oil Corporation's is task is an unenviable one — it has to first find dollars and then procure oil with them. Its revenue streams are in rupees, unlike its private sector counterpart, Reliance, which enjoys the advantage of a natural hedge in that its dollar export earnings are more than sufficient to bankroll its crude imports.
Crude oil constitutes the largest item of imports, at close to $160 billion. With its demand being inelastic to an extent, crude needs deft management, calling for a multi-pronged approach. There are a number of policy possibilities both for reducing both the dependency on oil and arresting the decline in the rupee.
Subsidised rich
In this regard, the experience of Mr Justice Dalveer Bhandari, nominated to the International Court of Justice, the Hague, after a distinguished career in the Indian judiciary, is instructive. He was reportedly mildly surprised when the Dutch authorities asked him whether he would require a bicycle — the preferred mode of locomotion in the Netherlands and a few Nordic countries, even among the high and mighty.
Indeed, the cycle is an option that should not be soft-pedalled — though one wonders how the local governments would create a safe cycle lane, especially in the metros. Along with promoting cycling as an alternative , we also need to do urge people to take to public transport.
When pampered executives think it infra dig to travel in public transport, the only alternative is to bring in an element of coercion — even numbered cars and odd-numbered cars being allowed on roads on alternate days to promote car pooling. The swanky cars and SUVs running on subsidised diesel should be ordered off the roads. To be sure, this, of necessity, ought to be a temporary measure, till sanity is restored in the pricing of the rupee.
The inevitable howl of protest against this putative, punitive measure must be taken head-on. It would send the right message to the rich and mighty — not to ride piggyback on the poor and rural folks, and be prepared for stern action. The Government, which helplessly remains a mute spectator when heavily subsidised kerosene is mixed in petrol and diesel, ought to swing into action and enforce the permitted ethanol mix on a war footing.
On the diplomatic front, India has done well to put its foot down to the US diktat of boycotting Iranian oil. Enlightened self-interest ought to be diplomacy's second name. Short of defecting to the Russian camp, the Indian Government should think in terms of some kind of counter-trade with Russia, which is brimming with oil. The short distance between the two countries would result in considerable economies in logistics cost. The Goa Government needs to be emulated insofar as taxing of petroleum products is concerned. To be sure, it could afford to do away with the tax on petroleum products, given its income from tourism, like Florida in the US; but the point is, crude and its derivatives should not be seen a milch cow by the Centre and State governments.
The Centre should gird its loins and flutter the dovecotes of the hitherto hard-to-tax categories, through a combination of presumptive taxation, information gathering through an annual information report, and coercive raids.
Root cause
The introduction of the Goods and Services Tax, whose main plank is multi-point or incremental tax on the value addition with potential to frustrate tax evasion, brooks no delay. Finally, the root cause of the problem — the flailing and falling rupee — needs to be addressed. A section of the media and ‘commentariat' sees a silver lining in the ongoing crisis — high cost of imports would discourage fuel consumption and correspondingly, the higher rupee realisations would spur exports. But given the inelastic nature of demand for crude, no substantial decrease in consumption is on cards, even if prices mount relentlessly.
Unless the US and Europe come out of their comatose state, Indian exporters cannot hope to make their fortunes on the back of a weak rupee, the way China has been doing for decades. Hence, efforts must be made to strengthen the rupee. Import of gold, the second largest item in the import basket, must be banned as a temporary measure.
External commercial borrowings (ECB) have come home to roost. Indian companies that borrowed abroad at cheaper interest rates are finding a hefty redemption bill — close to $50 billion — staring at them, that threatens to make a hole not only in their own balance sheets but the nation's as well. ECB for rupee payments must be banned as an initial step. All stops must be removed from foreign direct investment, a permanent and non-repayable source of financing with its potential for beneficial multiplier effects all round.
(The author is a New Delhi-based chartered accountant.)