March 17th, 2008 
krishna A considerable volume of petrol sales seems likely to go out of statist price controls, thanks to higher ethanol blending. Regular petrol is already blended with 5% ethanol. But with 10% ethanol blending set to kick in, it may put smaller engines at a certain disadvantage, due to technical reasons. So users of two-wheelers and older cars may give regular petrol the go-by. Instead, they may opt for “branded petrol, which is not blended with ethanol. More notable is the fact that the price of branded petrol is not quite determined by administrative fiat.
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So higher usage of branded petrol would mean less of governmental meddling in oil prices. But instead of such reform by default, what is required is proactive policy change and market -determined prices to better allocate resources in the oil economy.
Administered pricing of petro-products merely implies unalloyed populism to boost consumption of the non-poor. It means unrevised retail prices, never mind steadily hardening prices of crude oil. And reckless give-away have huge fiscal implications. Instead, what’s required is regular price revision to reflect international scarcity value. Incremental price changes would obviate the need for a steep, cumulative price rise. In tandem, what’s required is rationalisation of taxes on petrol, diesel, etc. It is not entirely true that oil taxes in India – more than 50% of the retail price of petrol, for instance – are strictly comparable with those in several other economies. Abroad, steep oil taxes usually go hand in-hand with a general system of value-added consumption taxes. It means no regressive cascading of rates, and provision for setoffs on taxes paid along the value chain. In India though, oil is out of the VAT regime. The empowered committee on VAT took the position that since oil prices are “administered,” there is no scope for VAT. It amounts to saying that two wrongs make a right! There are other distortions as well. The system of ad valorem oil duties means disproportionate increase in tax revenues in a scenario of dearer crude prices. There are onerous conditionalities attached to the retailing of oil products. It points at much scope for unearned rents. Also, the effective tariff protection for oil refining seems on the higher side.
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