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Buoyed by the exit polls that predicted an ultra-left victory in state elections, the communists vowed to stop the Government from hiking oil prices that could force oil companies to absorb a loss of over USD 16.5 billion or $13.5 billion for the exchequer. Apparently, their victories in
Kerala,
West
Bengal, and an alliance-driven victory in
Tamil
Nadu has encouraged them to oppose policies. In a preliminary meeting with the Petroleum and Oil Minister Murli Deora, they argued that what is required is rationalization of taxes and not increased prices.
The Government imposes a cess on oil worth USD 13.5 billion a year and a Central and State taxes of USD 28.3 billion. The communists think that instead of raising the oil prices in relation to world oil prices, the Government should forego these revenue streams to spare “the common man.” They think that an increased price of oil, petrol, and diesel will cause inflation to rise and affect the common man.
They are right to think that increased prices will cause inflation and affect the common man. However, so will the lack of price adjustment and this is where the communists miss the big picture. A lack of revenue by the Government will mean a larger fiscal deficit, which means a depreciation of the Rupee against world currencies. This will require adjustments through additional revenue from loans, broadening and deepening the tax base, or Disinvestment.
The Government cannot borrow any more with seriously
damaging growth prospects of the economy as it is already over-leveraged. Recently, Standard & Poor’s and Moody’s bettered the rating on India citing
improvements in debt situation and lower interests. If the Government borrows any more to overcome deficit, it will result in these rating agencies downgrading the economy squandering gains and making it more expensive for corporations to borrow money. Capital starved Indian companies already absorb 2/3rd of the all Asian (without Japan) capital through their foreign currency convertible bonds or 10% of the world’s bond investment to fund their expansions, growth, and mergers. With lower ratings, the cost of borrowing for the companies will increase compromising their earnings leading to lower taxes, growth, and losses in the stock market. More importantly, slowing down corporate growth result in a large opportunity cost for the nation as it struggles to compete with other emerging markets such as China and Russia.
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