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Press Release [FREE Access]
Petro Intelligence » High Fuel Prices Can Implode A Faltering Economy
By R. Sasankan

“Dilip Lamba, who owns a transport company in Jodhpur, has had more than three-quarters of his fleet of 50 trucks idling for months…The main source of their anxiety is not Covid-19, but rather a surge in fuel prices… Retail prices for diesel -- the lifeblood of India’s economy -- in New Delhi have jumped 30 per cent since the end of April, while gasoline has risen 16 per cent. Diesel makes up almost 70 per cent of our operating costs, said Lamba, whose company carries everything from cotton to cement to leather goods all over India. Higher diesel prices mean higher freight charges. But customers aren’t ready for it and we can’t absorb the costs.”

The epigraph to this article does not come from an Indian newspaper or news agency. Rather it is plucked out of a report filed by Bloomberg, a New York-based financial data agency, and pithily sums up the distress that is welling up in the Indian economy.

It encapsulates an unpleasant reality. The economy was already showing signs of tipping into a recession when the Covid-19 pandemic entered. The high fuel prices imposed during the lockdown have curbed demand for transportation fuels like petrol and diesel. According to provisional fuel sales data for June, diesel and gasoline consumption have gone down by 15 per cent and 14 per cent respectively.

Ever since it came to power in May 2014, the NDA government has chosen to mop up the benefits of falling crude prices through excise duty increases on petrol and diesel on the argument that the money was needed to enhance public spending on infrastructure as a sure fire way to kick start a faltering economy. That intention was noble, which was perhaps one reason why there was little meaningful resistance from the opposition parties or indeed the public to a policy that effectively denied the people the real benefits of the slide in the global crude prices.

The price of crude oil hovered around $ 114 per barrel before crashing in November 2014 – and then plunging to a low of $ 26 per barrel in 2016. In the first 15 months that the Modi government was in power, the excise mop-up more than doubled from Rs 990 billion in FY 2014-15 to Rs 2420 billion in 2016-17. Crude prices crashed once again in the last week of March 2020. The government promptly raised the excise duty on petrol and diesel. The excise duty on petrol was hiked by Rs 10 per litre and that on diesel by Rs 13 per lire. The annual gains for the government on account of the latest increase would be $ 30 billion, or Rs 2250 billion. India now ranks among the countries with the highest taxes on fuels, placing it almost on par with France, Germany Italy, and the UK.

Successive governments in India have been taxing transportation fuels consistently to increase their revenues. Politically feasible taxable areas are considered limited and this is precisely why government revenue as part of the overall GDP is quite low. Every budget has to allocate funds for welfare of the poor, finance education and health. Obviously, funds for these will have to come from direct or indirect taxes. The finance minister has to limit spending without breaching the fiscal deficit target. This is the reason why successive finance ministers have found petrol and diesel fertile ground for taxation.

However, the situation this time is completely different. Back in 2016, when the Modi government raised excise duties, the Indian economy was booming and it was being counted as the fastest growing in the world. The world is now sliding into a deep recession and the Indian economy is all set to contract significantly this year. Costly fuels will slow the economic recovery and may, in fact, only deepen the slide. Can the government afford such a situation?

The traditional policy of taxing fuels in the name of financing welfare schemes for the poor needs to be reviewed. True, India has the largest number of poor people in the world. It is equally true that the country has another area of poverty -- energy poverty -- which if addressed through proper taxation can effectively tackle the problem of hunger that millions now face.

India is struggling with a per capita income of less than $ 2000 a year; 90 per cent of the population lives in the shadow of poverty. The pandemic has raised the risk of more and more people sinking below an arbitrarily drawn poverty line at Rs 32 per day in urban areas and Rs 28 in rural areas. Energy poverty is equally staggering: a per capita primary and secondary energy consumption of around 31/32 per cent of global average. This is precisely why genuine energy experts argue that high taxes on energy makes no sense for India.

All over the world, it has been shown that adequate and affordable access to energy and the services that energy provides is the biggest enabler that pulls societies out of poverty and puts them on a firm path towards development. No country has become an upper middle income country (a status that India aspires to achieve) or delivered a Human Development Index of just under 0.8 with a per capita energy consumption of less than three times the current levels prevailing in India. High taxes on energy make access to primary and secondary energy unaffordable for the vast majority of Indians and limit their capacities. This keeps them dependent on the Government for all kinds of subsidies and support. We can tax energy once we achieve middle income status and reach per capita consumption levels at least equal to, or close to, the global average. China heavily subsidized energy till it achieved the upper middle income status. India actually generates almost 20 per cent of all Central and State revenues from energy taxes.

India is teeming with people who claim to be energy pundits. Many of them have dubious records, somehow worm themselves into committees and exert influence on government decisions despite their insufficient understanding of sectoral and economic realities. There are only a handful of truly genuine experts. These experts contend that Central and State taxes on both primary and secondary energy should not be different from that on other industrial raw materials or mined minerals. The revenue loss can be made up through a complex rejigging exercise but there can be no argument against the need to rationalise energy taxes. Complex economic modelling studies need to be carried out because of the linkages. The current subsidy regime and the direct and indirect tax system needs to be revised as part of these modelling exercises. The petroleum minister should take the initiative in forming a credible team at a credible institution which will undertake such a study. According to a top energy expert, the added buoyancy (from lower energy taxes) across multiple sectors will recoup almost 50 per cent of the revenue loss over five to seven years. And over the same period, the burden of subsidies on cooking gas, fertilizers, employment generation, and food etc. will make good a significant part of the balance.



To download the latest issue 'Volume 27 Issue 7 - July 25, 2020', click here
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