The statement made by Sanjeev Sanyal, principal economic advisor to the finance ministry on imposing the Good and Services Tax (GST) on petroleum products and the impact this would have on prices of oil and gas probably sums up what is at the core of the problem. In an interview to this paper, Sanyal indicated that while GST would bring parity in prices of petroleum products across different states it would not curb volatility in oil prices, as the crude oil prices are determined in the international market. So, the core of the problem is higher crude oil prices and the solution is lower crude oil price. Under the circumstances, and regardless of the party in power at the centre, policy makers can do precious little apart from tinkering with taxes.
The fact is that when crude oil prices rise, disposable income in the hands of people comes down. Over a period of time, that lower income leads to slowdown in economic activity and lower growth numbers come up down the line. The solution to this age-old problem lies in first accepting the reality that in the short term nothing can be done. More important is to work on a plan to ensure that in due course, maybe a decade down the line, the dependence on imported crude oil comes down. However, given the pace at which India is growing, decline in the rate of growth of demand for imported oil would itself be a big achievement.
Auto sales have been rising month after month for many years now and the demand for petroleum products will continue to rise. It is noteworthy that auto sales numbers do not tend to fall even when overall economic numbers are poor. Imagine what the sales figures will be — along with the demand for petro products — when the economy regains its paces.
One way to tackle this would be to put a policy framework in place to support electric vehicles. This not to suggest that government is not doing so already. But, that is still largely where the government is the buyer. Buying 10,000 electric cars is a small step. The real change in the consumption level of petroleum products would come when private purchase of cars and two-wheelers is geared towards electric or hybrid vehicles. This can be done by encouraging private companies to manufacture more electric and hybrid vehicles.
The push can be given in the form of tax incentives to companies on the amount they spend on research and development for sophisticated green vehicles. The government can follow a policy under which the research and development expenditure can be used to offset tax liability for a specified number of years. This will help both the company manufacturing battery-driven vehicles and the government to be winners — the manufacturer will be able to enjoy high sales and the government will be able to reduce consumption of oil. When the demand for imported crude oil is low, the government can look toward to lower volatility in currency markets.