The impact of sustained and high global crude prices will weigh heavily on the Indian economy.
The price of fuel at the pumps has been hiked every day for the last 11 days. Petrol is now at Rs 85 a litre in Maharashtra, which also imposes some 40% of state taxes on top of Central excise. Diesel, on which our transportation sector largely runs, has also crossed Rs 70 per litre in more than 15 cities.
These are all-time highs, even as they carry at least 50% in overall taxation, and up to 100%, if the sum is reckoned from the barebones cost of refined petrol and diesel.
What didn’t pinch when international crude prices were at about $40 a barrel, let alone $29 as it was in early 2016, is definitely hurting at $80. Besides, the taxes imposed on retail fuel were not so high at one stroke. Excise duty has been increased nine times by the Central government between November 2014 and January 2016, and cut only once by Rs 2, and this is before the states get to work.
The states, in fact, realise higher revenues in VAT and sales tax (calculated ad valorem) the higher the price of fuel. If this keeps up though, a customer could conceivably be paying Rs 100 a litre for petrol in the near future.
Is the government hoping for a downward trend in global crude prices soon? It could, of course, happen, with the easing of tensions, production bottlenecks, increased supply and removal of sanctions. It could also head the other way towards $100 a barrel, if conflict breaks out between the United States and Iran for example.
The impact of sustained and high global crude prices will weigh heavily on the Indian economy, as it did in the closing years of former UPA rule, when they ruled at $112 on average. Weakened macro economic data will harm an India that has currently developed a fine balance sheet. It has low inflation, very little or no current and fiscal account deficits, record foreign exchange reserves, a healthy growth rate in the region of 7.5% per annum, impressive FDI relative to context, little external debt, relatively better international credit ratings, a fairly buoyant stock and debt market, good monsoons/food grain stocks, and so on.
Former Finance Minister P. Chidambaram, agent provocateur fashion, has said current retail prices could be cut by Rs 25 a litre. This, of course, only if a big chunk of the taxation is withdrawn. But consider that the Central government realised Rs 242,000 crore in excise alone in 2016-17. It is, therefore, not so easy to let go of. It will, at an estimate, lose Rs 13,000 crore in excise revenue for every rupee cut in prices.
Reportedly, the government is reluctantly contemplating a Rs 2-4 cut in excise duties running at over Rs 19 per litre of petrol and over Rs 15 per litre of diesel. The states then put on at least as much and are equally loath to cut it back. Appeals to cut VAT on fuel have had just four states responding with mild cuts.
The government on its part has held inconclusive talks with the oil PSUs with a view to sharing the burden. It seems to be taking its time, despite the threat of looming inflation and the likelihood of a 25 bps interest rate hike to start with, when inflation spikes.
High fuel prices are seen as a direct catalyst to higher prices all around. Meanwhile, Highways Minister Nitin Gadkari, one of the best performing BJP ministers, rose to the defence by saying bringing down fuel prices will hurt the NDA’s welfare programmes. But can’t the government find the money elsewhere? Why does no government audit its own ever-expanding expenses with a view to making suitable cuts?
Fuel, including aviation fuel, is a convenient thing for a government to tax, as the nation has no choice but to use it. Even cigarettes and alcohol, perennial favourites for taxation, do have a voluntary elasticity to their demand projections. Asking people to use overflowing public transport, or suggesting they cycle or walk, seems to be less than viable alternatives, especially in mid-summer.
Other arguments to keep fuel prices high are even more specious, and range from an environmental push against petrol/diesel run vehicles, to a theoretical bid towards adequate levels of public transportation. Electric vehicles may indeed come to the rescue in the future. And conceivably, nuclear, solar and other green energies could generate all our electricity one day. But for now, the public is being saddled unfairly with onerous and unfair taxation on a near essential commodity.
Cars and other vehicles, not just the luxury ones, including commercial vehicles, are also taxed to the nines by this and former governments. Despite this, because of poor public transport options, people are buying cars and motorcycles in very large numbers. India is today one of the biggest automobile markets in the world.
But coming back to fuel prices at the pumps, we the public have been deceived. Prime Minister Narendra Modi spoke of his own naseeb when he cited how all-time low oil prices from the very start of his government in May 2014, have helped him repair a ravaged economy. This more so because India imports more than 80% of its fuel, and the demand is ever rising in quantum terms. But what has been good for the government has been far from salubrious for the people.
The doing away with subsidies on petrol, diesel, aviation fuel, liquefied petroleum gas (LPG) to the better off, and even discontinuation of the humble kerosene, was presented as a move to both improve the nation’s fiscal health, and take advantage of historically low global oil prices. The implication was that the public would receive much lower fuel prices at the pumps too, as they would float day-to-day based on international crude prices, just as they do in many countries abroad.
But the fact is, ordinary fuel purchasers abroad get the benefit of lower prices when they obtain, and we don’t. Here, the government quickly moved in after the subsidies were scrapped, and promptly began enhancing the excise duty on fuel before the states added their VAT and sales tax.
But because the NDA rules in 19 states out of 29 now, can’t petroleum products be brought in within the ambit of GST? However, if the exercise it to be “revenue neutral” per the accepted mantra, then prices cannot be brought down. The culprit is the lack of austerity in governance at the expense of the people.
So, for now, this lazy but sure-fire taxation on fuel is hard to replace. The Modi government, despite the public clamour, is still hoping to get away with a minimal cut, because of its increasing reliance on the votes of the poor. The poor, it is reckoned, do not consume much petrol or aviation fuel.
But some amongst them do use diesel, at least when they travel, albeit not those firmly below the poverty line, who probably don’t buy tickets. The poor ostensibly get the benefit from the money surreptitiously extorted from high fuel prices at the petrol pumps—at least according to Union Minister Gadkari. This has been engineered unilaterally, without any publicity or engagement in public discussion. This, following on from quite a lot of explanation to build public support for the removal of subsidies on fuel, presented as a general benefit for all. Besides, how Gadkari can draw a direct co-relationship between just one contributor to the government coffers, and the funding of welfare, is indeed a mystery. It could, after all, be paying some of the bill for all the roads being built by the NHAI under his benign gaze.
High oil prices hurt most of the consuming world. So sorting out the turmoil in Venezuela, a major oil producer in difficulties, and the confrontation with Iran, could resolve the issue at the macro level, sooner rather than later. There is also the mercantile tightening of supply by Russia and Saudi Arabia and lesser oil producers under their influence. America is touting clean coal even as it is ostensibly oil self-sufficient, though fracking does need higher oil prices. But major consuming countries and blocs like the EU, China and India are not without influence too.