Be ready for the oil shock on Saturday By Priya Ranjan Dash

NEW DELHI: With the Union Cabinet meeting slated for Friday being postponed to Saturday, the contours of the government's strategy for tackling the oil crisis are coming into view. Prime Minister Atal Behari Vajpayee's remark to party workers on Thursday that ``people have to be prepared for hard decisions in view of the prevailing international situation'' makes it clear that the Cabinet will decide to hike the prices of petroleum products on Saturday.

The first step in the strategy will be to increase the government-controlled prices of petroleum products such as kerosene, diesel, cooking gas, petrol and aviation fuel to reflect the spurt in global oil prices. The hike is expected to be across the board and steep. Current domestic prices of petroleum products, last revised in March, have lost all correlation with international prices which have been shooting up in recent months.

The next component of the strategy is aimed at meeting the challenge the oil crisis has posed on the foreign exchange front. It is learnt that the issue of dollar-denominated bonds by the State Bank of India for subscription by overseas Indians is proposed to be finalised soon.

Latest estimates show that India's oil import bill this year could jump to $22 billion from last year's $12.5 billion. The rupee has already been under pressure because of adverse market sentiments induced by the global oil price spurt. The country has built up high foreign exchange reserves sufficient to cater to its import requirements of over seven months in normal circumstances. But the reserves have been dwindling in recent months. They are down by over $3.5 billion from the record level of $37.5 billion.

A draw-down of reserves to fund oil imports is not prudent to the extent being necessitated by the high global prices. The reserves are proposed to be built up by the issue of dollar bonds, which could be on the pattern of the Resurgent India Bonds issued to overseas Indians following the Pokhran nuclear tests and economic sanctions in 1998. Those bonds, riding on patriotic fervour, were a huge success at that time, mopping up $4.16 billion.

The third component is to lower excise and customs duties on petroleum crude and products. But this is being seen as a contingency measure, lest the steep hike in petrogoods prices turns out to be politically difficult. In that event, it is possible the government will tinker with excise duties on subsidised products such as kerosene, cooking gas and diesel to soften the blow.

Looking at the magnitude of the deficit the government is running in supplying petroleum products, a hefty hike has become inevitable. The deficit could reach Rs 20,000 crore by the year-end if domestic prices remain unadjusted. To make a dent on this order of deficit, the subsidies on cooking gas, kerosene and diesel have to be substantially cut. Petrol is overpriced even in reference to the current international prices. But a 10 per cent hike in petrol price has to be carried out in sympathy with other products.

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-- Martin Thompson (mthom1927@aol.com), September 22, 2000