Cut oil tax to sustain economic recovery: India Tribune

Sushma Ramachandran

Chief Financial Journalist

The saga of the Ever Given, the container ship that blocked the Suez Canal for a week has shown the fragility of global trade flows. Hundreds of cargo ships, including oil tankers, were engaged in the logjam waiting for the ship to move and others chose to take the longer route around the Cape of Good Hope. The vessel may have been eventually moved, but the event has shown the impact of even one unexpected event on global supply chains. This is also true of international oil markets. Demand had fallen in April and May last year with such a sharp fall in prices that suppliers for a day or two paid their buyers to pick up stock. Even now, the oil markets are going through volatility based on the ebb and flow of the Covid virus.

International oil prices, introduced in the range of $ 40-50 per barrel throughout 2020, began to pick up in December based on the encouraging news of a vaccine launch and the the prospect of a global economic recovery. The Organization of the Petroleum Exporting Countries and their allies, known as OPEC plus, had also imposed production quotas on members to restrict market availability. The net result was that Brent crude prices rose critically to more than $ 67 per barrel by the beginning of March.

The trend has returned abruptly in the last few weeks. There were a number of reasons, including a new rise in European affairs and tighter loops of movement being imposed in Germany, Italy and France. The increase in cases has coincided with the slow pace of vaccination on the continent. India and other countries are also reporting a new surge of Covid’s disease despite the vaccine campaign under full swing. The bearish move in prices was exacerbated by the news of U.S. investments rising 6 percent in mid-March.

This trend is expected to continue for some time, as these factors are influencing the market. Brent crude prices currently rule out at about $ 63.55 per barrel and the U.S. West Texas Intermediate benchmark at $ 59.75 per barrel. This is a huge backdrop from the high of over $ 67 per barrel about a month ago.

The oil market situation now needs to be assessed by OPEC plus as they plan the next steps. OPEC, the largest player in the market, is dominated by Saudi Arabia and Russia is the most important ally. Although India has a better relationship than a cordial bilateral relationship with the two countries, this relationship in terms of oil prices is not much discounted. Indeed, a recent bid by Petroleum Minister Dharmendra Pradhan to OPEC, calling for price modeling to promote market stability, received a sharp response from the Saudi Energy Minister. He suggested that India should instead draw on their strategic petroleum investment reserves that were filled when prices fell to around $ 19 per barrel in April and May 2020. Although this may be an undiplomatic response, the uncertainty must be looked into. facing oil exporting countries over the past year. From their perspective, prices need to be maintained at around $ 70 per barrel to adequately support their economies. In contrast, prices ruled at less than $ 50 per barrel throughout 2020.

India, meanwhile, must consider its own interests as it is the third largest oil importer in the world. A few years ago, when prices had started to go up, they were trying to engage with China to reduce its role as a major buyer in order to seek price discounts for developing countries. The move did not yield much fruit just because oil exporting countries are more sensitive as their hydrocarbon resources dwindle. In addition, there is also a risk that the world will switch to other fuels such as electric power for cars. Even in the coming decades, it is expected that there will be a shift away from hydrocarbons towards renewable energy and that oil – producing countries may have more stocks on their hands.

In this background, India has no choice but to try to diversify supply sources to ensure a sustainable supply of crude oil. It has now opted for higher purchases of U.S. crude that are significantly cheaper than West Asian options, although higher commodity costs negate this advantage to some extent.

At the moment, however, the lowest oil prices are to the benefit of this country as it could significantly reduce oil import bill if the trend continues for the coming months. Oil imports cost the country $ 120 billion in 2019-20 but are expected to halve that number in 2020-21. The bill will be higher in the current crown but should be regulated if the market stays at normal levels.

With the global oil outlook now looking more favorable for India, it is time to revisit the heavy tax on fuels such as petrol and diesel. Tax levies could be raised several times last year as revenue rallies were almost halted, but there is no such excuse now that economic recovery is underway onwards. With GST collections coming back to pre-pandemic levels, now is the right time to reverse last year’s tax obligations raised.

Finance Minister Nirmala Sitharaman has admitted that it is time to hold a discussion on this issue with state governments that have also been guilty of imposing more taxes on petrol products. Despite this method of settlement, no action has yet been taken on this issue. At the same time, high fuel prices are offset by steep inflation. Entry prices have risen sharply due to rising transportation costs and manufacturers are reportedly preparing to increase product prices. It is time for the government to get involved in cutting taxes on oil products before rising prices negate the impact of the better economic recovery process.