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COUNTER VIEW: It'll hurt the middle class
May, 31st 2008

International crude oil prices are at an all-time high at about $135 a barrel. Clearly, oil companies are taking a hit and cannot be expected to straddle a financial knife-edge indefinitely.

Already, they are in danger of slipping into the red. Analysts suggest that fuel subsidies are costing the three main state-owned operators Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum losses of about $65 a barrel on the current crude oil price.

But is increasing the price of petrol by as much as Rs 10 per litre the only answer?

Any rise in petrol prices will come at a difficult time for India, already being hit by high inflation, largely because of high crude oil prices.

Raising pump prices will only add to inflationary pressures. It will also be a politically dangerous move, since the government will be under unwelcome pressure before the upcoming general elections.

Such a sharp increase in petrol prices is also bound to hurt the middle-class consumer the most. This, in turn, could lead to India's growth story running out of steam.

Surely, there are other measures the government can adopt to rescue the oil companies. The central government imposes customs and excise duties on both crude oil and on petrol and diesel.

A cut in these duties would make it possible to maintain prices at their current level for some time. In fact, in 2007-08, high oil prices resulted in the exchequer getting richer by some Rs 35,000 crore.

So, if the government abolishes the customs duty on crude oil, which, at present, is 5 per cent and cuts the duty on petrol and diesel to 2.5 per cent from the current 7.5 per cent, the oil companies would save approximately Rs 13,000 crore a year.

ONGC, which produces a large amount of India's domestic crude, can also subsidise petrol refineries like IOC by passing on the benefits of high global crude oil prices.

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