The decision to keep diesel, petrol prices high is bad economics and bad politics

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The decision to keep diesel, petrol prices high is bad economics and bad politics

A few months ago, when the government decided to not alter the tax component in diesel and petrol prices, despite the beginning of the surge in their prices; the argument of building up revenue pool made economic logic.

According to the finance ministry’s revenue collection projection, the government expects to mop up more than Rs 2.579 lakh crore by levying taxes on the petroleum products by the end of this fiscal. This is a massive jump from the gross revenue collection of around Rs 88,600 crore in 2013/14, in the last fiscal the collection was Rs 2.016 lakh Crore. These collections stabilised the fluctuating GST collections in the indirect tax kitty.

But now, when the international petrol and diesel prices are surging and the Indian currency is depreciating, these revenues are becoming a bone of contention. Given the circumstances, should the government hold these taxes? And is there any alternative? Also for how long can the government hold them up?

Incidentally, the general elections are due in next 11 months and the high petrol and diesel prices are already pinching the middle class. This is not only a huge voter base, but ruling BJP’s maximum cadre come from this segment. The middle class bore the maximum brunt of demonetization and implementation of GST in the country, and the pricing of petroleum products is again becoming a sore point for them.

If we talk purely on economical parameters, this may help the government to get more revenues, but will also lead to a price rise. The impact could already be seen. The monetary policy team of RBI is not only refusing to reduce the interest rates, but is also cautioning their colleagues in the fiscal policy monitoring division, about impacts of inflation. Most of the economists, believe that it is much wiser to pay tax upfront than let inflation and other means squeeze this money from our pockets. The consumers of petrol and diesel are facing heavy taxation, and now it is fueling inflation as well. The higher inflation will also erode the purchase capacity of both government as well as public at large. In a way, it will reduce the value of the revenue earned. This makes the case for the dilution of taxes more stronger.

The union budget of public spending and revenues was drafted on the assumption that the crude oil prices in the international market will stabilize to $55 a barrel, along with the benign prices of petroleum products. However, the cut down of the crude oil production in the OPEC countries along with Russia, and massive collapse in Venezuela, led to the price soar. Subsequently, the US threat of sanctions on Iran added the ‘fear premium’ to the crude oil supplies. At the same time, the commodity prices too are regaining their upswing.

But with the rise crude price along with other commodities, the policy of keeping the prices of petrol and diesel artificially high, is inflationary. It is not only increasing the cost of transportation, but is also making manufacturing costlier. The calculations done by the Chief Economic Advisor, Arvind Subramanian in last  economic survey counted this as a big risk to the Indian economy; pointing out that every $10/barrel rise in crude prices slows growth by 0.2-0.3 percentage points and fuels WPI inflation by 1.7 per cent.

Petroleum Minister Dharmendra Pradhan’s officials calculated that India might have to shell out $30 billion more to buy crude oil at the same quantity. In the last fiscal, in 2017/18, India spent $87.72 billion to buy oil from the international market, making it the bulkiest item on the country’s import bill of $417.57 billion. Last fiscal, India imported 213.9 million tonnes (MT) of crude last fiscal, about 78 per cent of its demand. The last year’s trade deficit was $13.7 billion. This is also creating pressure on the depreciating currency. On February 1, this year, one would have required Rs 63.90 to buy a dollar bill, whereas, on May 21, the price went on to Rs 68.05 to buy the same dollar bill.

The unrest among the urban voters is obvious, who are paying through their nose to buy these fuels. Is there a sound economic reason to continue with the higher oil prices? The answer is no. The top league in the ruling BJP believes that their vote bank has shifted from the massive middle class to poor and dalits, and therefore the public spending will be better vote churner. But they are forgetting that the inflation could hit them worse. The ball is finally in PM Narendra Modi’s court.

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