Against consumer and good economics

If we assume that the quantity of petrol and diesel consumed in the country has remained the same, the governments are garnering by way of tax revenue twice the amount they collected in May 2014.

I remember the day in July 2008 when the price of crude oil touched $147 a barrel. I remember the day when the King of Saudi Arabia convened a conference of oil-producing and oil-consuming countries to discuss the crisis of rising oil prices. I led the Indian delegation that included Murli Deora, then minister of petroleum. At the conference, we proposed a price band: an upper limit which will not be crossed by the oil-producing countries and a lower limit which will not be breached by the oil-consuming countries. It was sort of mutual guarantees by both sides. Every one nodded in sage agreement, but there was no agreement.

Throughout the period of the UPA government (2004-2014), except for a brief interlude, crude oil prices ruled high. Taxing petroleum products, especially petrol and diesel, was unavoidable because we needed the revenue and we needed to curb consumption. Subsidising some petroleum products, especially kerosene and LPG, was also unavoidable because we needed to soften the impact on the poor and we needed to save the forests. It was a balancing act that was performed under great stress. Nevertheless, whenever there was a price increase, the UPA government was savaged by the Opposition, notably by the BJP.

Commodities, Oil Prices Collapse

Since 2014, the oil world has turned upside down. Demand for commodities, including oil, has collapsed. New and cheaper methods have been found to produce shale oil. The price of crude oil has declined sharply. Russia witnessed a recession. Saudi Arabia was obliged to impose an income tax on a section of its citizens. Venezuela is bankrupt. Oil consumers got a windfall.

India is the exception. India got a windfall, but the Indian consumer pays the same price! Look at the attached table:

 

If we assume that the quantity of petrol and diesel consumed in the country has remained the same, the governments are garnering by way of tax revenue twice the amount they collected in May 2014. The main culprit is the Central government: on every litre of petrol it is collecting Rs 21.48 as against Rs 9.48 in May 2014, and on every litre of diesel it is collecting Rs 17.33 as against Rs 3.56 in May 2014. Actually, consumption has increased by 17 per cent in the last three years, so the gross collection at higher tax rates is even more!

Easy Money

The tax collected is easy money. Easy money becomes an addiction. Excise duties on petrol and diesel have been raised on 11 occasions by the NDA government since May 2014. On these two products alone, the Central government earned Rs 3,27,550 crore in 2016-17 (RE).

Average Brent crude oil price has declined by 49 per cent since May 2014. Factoring that decline, and if the central tax component had remained at the level of May 2014, the retail price of petrol should have come down by 19 per cent and diesel by 21 per cent. They haven’t and are actually at the same or higher level.

We are in this situation because we have a greedy government that believes in ‘tax and spend’. It has to find the money for ‘government expenditure’ since that is the only engine of growth that is running (read Clueless in New Delhi, Indian Express 17-9-2017). The current government believes that middle-class and lower middle-class consumers who own vehicles should pay the hefty taxes because, according to the new minister of tourism, “they are not starving”!

If prices of petroleum products are reduced, reflecting economic realities, the government will benefit in many ways: the subsidy expenditure on kerosene and LPG will be lower and the railway, defence and other departments
will incur lower fuel costs.

Anti-consumer

Because of the predatory taxation policy of the government, the decline in the average price of crude oil has had no impact on inflation. Transport costs remain high. Consumers’ capacity to spend on other goods and services is constrained. Private consumption has increased barely at 6.66 per cent in Q1 of 2017-18. Besides, the competitiveness of Indian producers and service providers has been eroded vis-a-vis their foreign competitors. It is also unwise to rely on heavy taxation of one commodity; if the price of crude oil rises sharply, the government would have to forgo revenue or inflict a huge burden on the people. Viewed from any angle, maintaining retail prices of petrol and diesel at the same level they were in May 2014 is anti-consumer, anti-competition and anti-economic principles.

Resentment is building up among the people. There have been protests in many parts of the country. The Government is deaf to the pleas to lower the taxes and pass the benefit of lower crude oil prices to the consumers.
In the context of GST, Dr Manmohan Singh said it was “organised loot and legalised plunder”. In my view, those words aptly describe the NDA government’s policy of taxation of petrol and diesel.