DEBATE There is no doubt the oil companies are bleeding, but the issue is whether the government should also reduce the extra taxes it gets from high oil prices Dharmakirti Joshi Director and Principal Economist, CRISIL Ltd "India's level of taxes on oil is comparable with that in most countries, so cutting taxes is no solution. Higher prices will also encourage conservation in usage" The sharp increase in global crude prices has brought the issue of energy pricing and its taxation to the fore. A number of emerging economies have suppressed petroleum prices in order to control inflation. According to an IMF survey, only half of 42 emerging markets aligned domestic petroleum prices to global prices in 2007. With oil prices touching $135 per barrel, the cost of keeping a lid on prices of petroleum products has become fiscally unbearable. India too, by suppressing the prices of petrol, diesel, kerosene and LPG has pushed the losses of oil companies to unprecedented levels. This is imposing a huge fiscal cost on the government while crippling the finances and expansion and modernisation plans of oil companies. And above all, the consumer has got no signal to rationalise oil consumption. The usage of oil in terms of barrels per unit of GDP has remained stagnant in the last three years, implying no attempt at conservation. Industry does bear the brunt of rising oil prices as it faces a decontrolled price regime, but the individual consumer remains largely insulated from the global crude price scenario. As a sharp correction in global crude prices does not seem plausible in the near future, a number of countries have raised domestic retail prices of petroleum products. Indonesia has raised prices of petroleum products by 30 per cent while providing subsidy to the poor. Sri Lanka and Taiwan too have initiated a similar price correction and Bangladesh and Malaysia are contemplating the same. With inflation crossing 8 per cent, the Indian government too has been vacillating over the issue of pass through of global crude prices for some time. There has been talk of imposition of an oil cess and also of rationing. None of these are enduring solutions. Rationing, for instance, is known to promote hoarding and black marketing. It is also argued that the high level of taxation keeps the pressure on oil prices in India. In fact, India compares favourably with many other countries in terms of level of taxation. Oil being a scarce resource needs to be taxed. The problem in India is not with the level of taxation but with the structure of taxation to support the subsidy and cross subsidy regime. We missed the opportunity of raising domestic oil prices when the inflation was low last year. Today, there is no option to raising oil prices as price signals are the only tool that will work. Global crude prices are not within our control but efficient use of oil definitely is. Raising the prices of petroleum products will trigger efforts at its conservation and efficient usage as has happened in OECD countries. Needless to say, this will also reduce the fiscal stress of the government and work towards restoring the health of oil companies. The consumer will bear the brunt, but enduring some