Daily Editorial Analysis for 06th July 2022

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Crude solution

GS Paper 3: Indian Economy
Important for:
Prelims exam level: Windfall Tax
Mains exam Level: Crude Solution
Imposition of Windfall Tax: An Extraordinary decision
Extraordinary times call for extraordinary measures. This seems to be the most charitable explanation one can give for the Centre’s decision last week to impose a windfall profits cess on domestic crude producers, and special additional excise duty on petrol and aviation turbine fuel (ATF) exports, and diesel exports.

Declaration from the Exporters

• Exporters will also need to declare that they will supply at least 50 per cent of their export quantity in domestic markets.
• Mercifully, smaller producers with less than 2-million¬barrel crude output will be exempt from the windfall cess, and so will be any production by large companies over and above last year’s output.
• With the Russia-Ukraine conflict and surging post-Covid demand sending global crude oil prices shooting up over $110 barrel in the last four months, India-based oil refiners and upstream producers have enjoyed super-normal profits in recent months.

Centre’s objective

• The Centre’s objective behind the series of measures appears to be two-fold.
o One, increase supplies of transportation fuels in the domestic market
o Two, tap into the super-profits that the crude oil producers and refiners are making through their nimble-footed strategies.
• Upstream companies such as ONGC, Oil India and Vedanta which sell crude to oil marketing companies at international parity prices have seen their realisations rise to over $110 a barrel from $70¬80 a barrel.
o The Centre now seeks to appropriate as much as $40 a barrel of this, which it contends is the “windfall”.
How private refiners were making huge profits?
• Private refiners such as Reliance Industries and Nayara Energy have been importing Russian

Upstream Companies

• Companies that search for deposits of oil or gas (exploration) and then its extraction through drilling or other methods.
• Upstream also includes related services companies such as those dealing in rig operations, feasibility studies, machinery rental, and extraction of chemical supply.

crude at deeply discounted prices and selling refined products in global markets, thus earning crack spreads of $20¬30 a barrel against the normal $12-13 a barrel.

What has sparked the fuel shortage?

• The diversion of private refining capacities to cater to export markets almost wholly has sparked domestic fuel shortages, with pumps in a few States running dry.
The Smart move
• The levies put together are estimated to generate revenues of around ₹52,000 crore for the Centre if they remain until March 2023.
• The smartness of the move lies in the fact that the levies will not increase retail prices and have nil impact on inflation while compensating for the loss of revenues from the recent excise duty cuts on petrol and diesel.
• From a macro-economic perspective, the additional revenue is certainly good news for the fisc.
• Centre should ensure that levies on windfall gains and export tax on fuels are temporary steps
• The Centre must note that while imposing ad hoc cesses may help raise opportunistic revenues, it doesn’t make for sound economic policy.
• In the long run, it is extremely important for India to step up its domestic exploration efforts and reduce its import dependency on crude oil.
• Appropriating excess profits of upstream companies during good times while doing nothing to support them in bad times, is far from conducive to oil capex.
• Sudden interventions in the commercial decisions of refiners and producers will also undermine efforts to draw investments into the sector or disinvest PSUs in future.
• Cesses in India, once imposed, have a habit of staying long beyond their promised tenure.
• In this case, it is critical for the government to keep its word on periodically reviewing these levies to lift them as soon as super-normal profits evaporate.

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