No Free Lunches: A Cut In Petrol Prices Would Come Around To Hit In Other Ways

No Free Lunches: A Cut In Petrol Prices Would Come Around To Hit In Other WaysA petrol-pump at Prabhadevi, Mumbai. (Sattish Bate/Hindustan Times via GettyImages)
  • If the government bears some of the burden of rising petrol prices, it would give a feeling of immediate relief. But it wouldn’t be the end of the problem.

More than 56 per cent of the Indian government’s excise revenue comes from the petroleum sector. It is not a recent development but a standing phenomena of the government revenues for decades. The data on this is available in successive reports of the Comptroller and Auditor General . Of the total collections of central excise, petroleum products (petroleum and other lubricants-POL) account for 56.42 per cent. A far distant is taxes on tobacco at 8.82 per cent. Other taxes like those on iron and steel account for 8.45 per cent and cement at 5.45 per cent.

In fact, if a purist says oil and tobacco both pollute, then one has to agree that two thirds of India’s tax on goods comes from these polluting sources. But beyond those cavils, it is clear that excise duty receipts of the centre is basically built on POL. As the table also shows, it makes sense why successive governments have always dipped into the petroleum sector to shore up their balance sheets.

It is the same in states too and the reason why both are so reluctant to give this up to the goods and services tax (GST) structure. This is the tax that has balanced give aways on direct taxes and on subsidies. POL has established the ranking of central excise duty as the largest source of indirect tax. It is clear that if the government does not use this source, the alternative for the public is to reconcile with a higher rate of direct tax, since GST has already set the rates for indirect tax. Is there a public consensus to pay higher income tax?

The extent of dependence on POL got compounded when the National Democratic Alliance (NDA) government at the centre decided to take advantage of the dip in crude oil prices from late 2014 and in March 2015 to balance its budget. There was of course a precedence. POL has been used to finance road building since 1998 in the form of road cess, instituted by budget 1998 and 1999, first on petrol and then on diesel. Again in 2002, the government imposed a surcharge, a special additional excise duty on petrol to finance its sagging revenue.

It also could not have been otherwise. So even though the NDA government made way for the United Progressive Alliance (UPA) government in 2004, these duties remained alive. They are also a reasonably fair set of taxes, since their pass through on prices is much more muted than say of vegetables. For instance, according to Care Ratings, a 10 per cent rise in the price of crude oil would raise consumer prices by a little less than 0.2 per cent. The rise would hurt more when fares of buses and railway tickets rise.

The problem is that since January 2016, the price of crude has risen by 86 per cent. So this is what is making people uncomfortable. Though the rise in prices has not been continuous. One of the reasons for the discontinuity is the rise in the value of rupee, which has cushioned the impact of rise in price of crude in international markets. As the NCAER quarterly report notes, “The increasing trend in fuel & light from January to April 2017 has been reversed…(so) the CPI combined inflation rate fell to 4.5 per cent in June 2017 from 6.1per cent in April 2017. The same trend can be seen in CPI rural and urban”.

In an earlier era the government would soak in some of the rise in POL prices by not passing them on at the gas stations. This will increase the subsidy on POL, something that environment groups have campaigned against bitterly. Yet, a rise in subsidy would give an apparent feel of relief to consumers. The government would make up for it later through additional borrowings from the market that would raise the rate of interest for all concerned. Remember, POL prices impact the middle class more than the lower class, but a rise in borrowing by the government, hurts all classes. But then the middle class is a more vocal constituency.


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