DNA Money Edit: Economy may be inching towards hard landing

Just when the economy was beginning to get back on track after a prolonged lull as indicated by healthy growth in consumer spendings across the sectors, a hard landing is turning out to be a very real prospect.

Diesel price touching Rs 72 a litre in Mumbai and the rupee edging towards Rs 70 a dollar as being widely speculated upon by the industry is set to hit the economy hard.

Talks of government providing some minor relief in the form of duty cuts on petroleum products would only offer proverbial straw to cling on to.

We need some serious policy initiatives to tide over the impending economic crisis.

The fallout of the twin issues needs to be kept in mind. Weakening rupee coupled with surge in crude prices would severely bloat the country's import bill, transport costs would spiral and all crude-based inputs costs for industries ranging from polymers to paints will increase. With the risk of monetary policy turning hawkish, there's a good chance of private investment going into hibernation mode all over again. Upcoming elections coming with its own set of baggages of crowd pleasing will become unproductive.

With global oil prices once again spiralling upwards, the macro-economic risks of higher inflation, higher trade deficit and pressure on balance of payments with attended consequences for the rupee value have once again surfaced.

The price of petrol was hiked by 30 paise on Tuesday to Rs 84.4 a litre in Mumbai and diesel was raised by 27 paise to Rs 72.21 a litre, according to data released by Indian Oil Corporation Ltd. The price hike is in line with rising oil prices. Brent crude rose 0.9 percent on Monday to close at $79.22 a barrel.

The effective sales tax on diesel ranges from 6-29%. This means, every time there's an increase in crude oil prices, it brings more revenue to the states. The Centre also charges a fixed amount of Rs 19.48 on per litre of petrol and Rs 15.33 on diesel across the country. The total levies put together are nearly 60 per cent, and if the central levy and dealers commission are added, the amount goes up to nearly 100 per cent over the real cost of fuel.

More than a week after the state-owned oil firms ended a 19-day pre-Karnataka poll hiatus on revising fuel prices, petrol and diesel rates have touched record highs. Petrol costs Rs 76.87 per litre in Delhi and diesel costs Rs 68.08 a litre. In last nine days, petrol price has risen by Rs 2.24 a litre and diesel by Rs 2.15.

The government should have rolled back the excise duty hikes undertaken when crude oil prices were lower," Kerala Finance Minister Thomas Isaac told BloombergQuint in an interview.

Industry association Ficci's President Rashesh Shah also said that the government should reduce excise duties. Shah added that the central government should also work with states to bring petroleum products under the Goods and Services Tax regime