Skyrocketing petrol and diesel prices: What about the taxes you levied on us, Mr Jaitley?

Anshuman Tiwari
Anshuman TiwariMay 21, 2018 | 11:38

Skyrocketing petrol and diesel prices: What about the taxes you levied on us, Mr Jaitley?

Whichever way one may grind Modi government’s epically clichéd "achhe din", it is difficult not to see the contradictions inherent in the slogan. While buying diesel/petrol at the highest ever prices, one cannot forget the good old days of dirt cheap crude between 2014 and 2018. Those were the days when the world was enjoying the benefits of cheap oil, but finance minister Arun Jaitley used the opportunity to impose heavy taxes on petroleum products on the pretext of saving money for the rainy days.


Crushed under skyrocketing oil prices once again, it is only natural for us to ask about where the savings/earnings from cheap oil and high taxation have disappeared? Will the government protect us from the rising oil prices with the help of those savings?

The answer lies in the story of the bizarre fiscal management of four years.

Let us comb the fiscal numbers

1) The celebration of falling oil prices began in the second half of 2014 when crude sank to $46 per barrel after touching a peak of $132 per barrel in 2008.

2) The crude oil slump provided the government the latitude to deregulate fuel prices and oil marketing companies began to change prices on the basis of crude and other costs on a daily basis.

3) While people were expecting cheaper fuels on account of crude crash, the government hiked excise duty to Rs 21.5/liter in petrol and Rs 17.3/liter in diesel by FY2017.

4) This led to a surge in the excise collections from petroleum products to 1.6 per cent of GDP in FY2017, which was only 0.7 per cent in FY2014. This resulted in record tax collection on oil in the decades.


How the earning were used:

A big chunk of the gains from higher duties on petro products was transferred to states under the recommendation of 14th Finance Commission.

Rest of the funds were used to pay the Seventh Pay Commission for wages to government employees.

Two more benefits accrued during the good old days of cheap crude oil. Inflation was fell from 5.2 to 1.8 per cent for wholesale and from 9.4 to 4.5 per cent for retail. Additionally, cheap import brought the current account deficit — inflow and outflow of external resources including foreign trade deficit — down to a comfortable level.

As oil boils  

1) Economy stares at a fresh bout of inflation on account of rising prices of petrol and diesel. The non-subsidised LPG will soon join the league.

2) If unregulated fuel continues to move as per current pricing mechanism, $10/bbl increase in crude from the level of $60/ bbl could increase average inflation by around 50bps in FY2019. The overall impact of inflation could be higher, including freight charges etc.

3) The current account deficit is likely to increase around 60bps for every $10/bbl increase in crude price. A negative CAD has already triggered rupee meltdown.



How can we be saved from the oil-inflation ambush?

The government has to take a risk on the fiscal deficit front in order to save the economy from the oil boil. The ministry of finance has no option but to cap fuel prices by lowering excise duties. Assuming crude at $65/bbl, the Rs 2/ltr reduction in excise duty could increase the fiscal deficit by 10-12bps from budget estimates. Also, slippage in GST revenues cannot be ruled out. 

States can offset the high prices of oil by reducing VAT on petro products and returning the benefit they had received during the ache din of cheap crude oil. However, despite receiving a higher share from the Centre, states’ fiscal situation has moved from bad to worse in the last few years, therefore benevolence from them seems impossible.

Since oil prices are rising and revenues are sliding, the idea of bringing diesel-petrol prices within the purview of GST now rests in a dustbin.

The naked truth  

In the last four years, the government slapped heavy tax on cheap oil but did not take the trouble to find out an intelligent way to manage savings and earnings. When the world was benefiting from cheaper fuels, Indians were happily buying costly fuel expecting the government would use the proceeds to ease our difficulties in future.

While combing through the numbers, one may find that the pattern of the management of oil economy in the last four years is effectively a tale of fiscal mismanagement. The fiscal acumen and munificence of the last four years were essentially based on the proceeds of cheap crude oil and heavy taxation.

Jaitley couldn't have offered the Seventh Pay Commission to employees and increased transfers to the states if the low-priced crude would not have helped in unleashing heavy taxation. As the good days of cheap oil end, the fault lines in India’s macro economics is starting to look scary.

Milton Friedman's saying is coming true at your nearest petrol station: “If you put the federal government in-charge of the Sahara Desert, in five years there'd be a shortage of sand."

Read this story in Bangla

Last updated: May 24, 2018 | 14:01
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