Price it right

The rise in the inflation rate to 7.6 per cent shows that prices are continuing to rise. No measures have been announced by the government so far. As an immediate step, the government must cut import duties so that products which are more expensive domestically should become cheaper to import. If prices do not rise, and domestic supplies are indeed sufficient, then despite lowering duties, imports will not rise and there will be no harm done. However, if prices of essential commodities like sugar and edible oils, that have already seen a sharp increase, go up further, the option of cheaper imports will allow domestic supplies to be supplemented and prices to remain in control. Current prohibitive levels of duty of 60-70 per cent artificially keep prices up. To control inflation the government needs to cut tariffs. Options like raising interest rates bring pain to large sections of the economy, and should not be attempted before the option of cutting tariffs.

But will the government choose the right policy? After all, even if cutting tariffs helps the vast majority of consumers, it does hurt a small handful of producers. And, when this producer is the government itself, what will it choose to do? A rise in crude oil prices has a double whammy for the government. Petrol and diesel carry an import duty of 20 per cent, while crude has a tariff of 10 per cent. When there is a rise in the price of oil, the refinery margin of oil companies increases. As a result oil companies, most of whom are PSUs, have made a huge growth in net profits in the first quarter of 2003-04. As reported in The Indian Express on Thursday, IOC8217;s profits in April-June, the period of rising petroleum prices, grew by 56 per cent, over the same period last year. The profits of HPCL rose by 58 per cent, of Chennai Petroleum Corporation by 488 per cent. In sum, the profits of the seven PSU refineries rose from Rs 1618 crore in April-June 2003 to Rs 2427 crore in April-June 2004. If the custom duty is cut, it would be cheaper to import, and these companies will have to cut down on their selling price and accept lower profits.

Second, the government earns more in terms of higher excise duties when petro prices rise. The duty on petrol is 26 per cent, while that on diesel is 11 per cent. If price rise in petrol and diesel is controlled, then the government will not get the additional revenue that it will earn as higher excise collections, were petro prices to continue rising. In the current framework, with every dollar rise in the price of oil, more money is shifted from the pocket of the consumer to the government. This must change.