NEW DELHI, May 22: The opposition of the Left to a sharp hike in petroleum prices has forced the Finance Ministry to reconsider its stand against reducing customs duties on crude and petroleum products. The suggestion to cut import duties was put forward by the Ministry of Petroleum as a vital component for reducing the deficit. It has argued that unless this is done, a sharp hike will be required in petroleum prices which may be politically unacceptable.

While a final decision on steps to cut the Rs 24,500-crore deficit (estimated by March 31, 1998) will be decided at the United Front's Steering Committee meeting on Sunday, the ``customs duty cut'' option is beginning to look more likely now. In fact, on Tuesday, the Ministry of Finance asked the Ministry of Petroleum to resubmit its suggestions which contained the customs duty cut option.

The Ministry of Petroleum has proposed that the import duty on crude oil be reduced from the present 25 per cent to 15 per cent, and on diesel from 30 per cent to 20 per cent. It has then recommended that the price hikes be kept to Rs 30 per cylinder on LPG and Re 1 per litre on kerosene, and Rs 1.5 per litre on diesel. Through this option, the deficit can be brought down to around Rs 12,000 crore by the end of the financial year.

What will be critical in any decision on the price hikes will be the period over which the deficit is to be wiped out. In this case, the Ministry of Petroleum estimates that the deficit can be wiped out in three years. It is also being suggested that whatever the extent of the hike, the Govt should also give an indication as to over what period the administered price mechanism (APM) -- which governs the pricing of petroleum products like petrol, kerosene, and diesel -- is to be dismantled.

The other objectives would be to commit the government to a time frame over which the subsidy burden is to be removed and narrow the abnormally high price differential between kerosene and diesel. Due to the low price of kerosene, a third of all kerosene sold in the country is diverted and mixed with diesel.

With the Ministry of Finance reconsidering the duty cut option, the Ministry of Petroleum also appears to be toning down its demand for getting back the Rs 4,429 crore which the Ministry of Finance had taken from the Oil Pool Account in 1994 to balance the budget. Had the Ministry of Finance agreed to this (along with the price hikes and the duty cuts), the deficit would have been wiped out in 1.5 years.

Apart from the pressure from the Left, the change in the Ministry of Finance's view appears to be dictated by the recommendations of the Technical Group on Fiscal Incentives for the hydrocarbon sector. The group has recommended a cut in customs and excise duties prior to the dismantling of the APM. In which case, the argument doing the rounds in the Ministry of Finance is that since this has to be done soon, it might as well begin now.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.