Wednesday 13 September 2000 Spurting oil prices burning hole in economy By Priya Ranjan Dash

NEW DELHI: While most parts of the world are already reeling under the impact of the spurt in global oil prices, the shock will be truly felt in India only towards early October as price control provides an insulation. By all indications, the artificial lid will be off by then as the government would have gone through the necessary political process for the hike in the prices of petroleum products.

Petroleum Minister Ram Naik has talked about the possibility of the government employing a combination of three instruments, including price hike, to tackle the crisis. But officials visualise price hike to be the government's only resort.

The oil crisis essentially is that the government is running huge arrears in payments to oil marketing companies. The companies may not be left with enough cash to supply oil.

The deficit in payment has arisen because the cost of supplying petroleum products has gone up, while prices charged from the consumer have not been hiked since March. The deficit has mounted to Rs 9,000 crore on September 1 and if nothing is done, the gap will widen to Rs 15,000 crore by the end of the current financial year.

None of the three instruments, Naik has indicated, softens the landing. Reduction in duties on crude imports or an excise cut on petroleum products may bridge the oil account gap by Rs 12,000 crore. But that will only transfer that deficit to the general exchequer, with consequential adverse impact on inflation and interest rates.

The option of falling back on the financial engineering of the kind devised in 1997 is not practical. The government had then issued bonds to oil companies in lieu of their dues of over Rs 13,000 crore to avoid a sharp hike in petroleum product prices. This time round, the option is not there as a part of the old bonds are yet to be redeemed.

The hike in product prices would have to be steep considering the gap between the controlled domestic prices and their cost. That is a major political question which will involve consultations at various levels after the Prime Minister and the finance minister return from the US.

Officials, however, point to its economic impact. If inflation this year has continued to hover around 6 per cent against last year's 3.5 per cent, the single factor has been the hike in petroleum products prices in March. In the wholesale price index for all commodities, fuel, lubricants and oils as a group have witnessed an increase of nearly 30 per cent, while manufactured goods have shown only a marginal increase and food items have actually fallen sharply. Higher inflation will feed into higher interest rates and, ultimately stifle growth prospects.

http://www.timesofindia.com/130900/13home5.htm

-- Martin Thompson (mthom1927@aol.com), September 13, 2000