In the past 14 months, international oil prices in US dollars have fallen by around five percent. The exchange rate of the rupee against the dollar is largely stable. Imported crude oil has become cheaper. So we should have seen that retail prices for gasoline and diesel in rupees have fallen by at least five percent compared to January 2020. Instead, they’re 20 percent higher.
Any other country would have passed the benefits of cheaper oils on to its citizens. In the US and Thailand, local retail prices are down five or six percent, and in other countries where the local currency has strengthened even more against the dollar – like China or Korea – retail pump prices are 11 percent cheaper. However, gasoline and diesel prices have risen sharply in India and may have seen the highest increase in the world.
Why are fuel prices rising in India despite a decline in crude oil and a relatively stable or strong rupee? This is due to the excise duty component, which has increased relentlessly. This component is now almost 70 percent – which is also the highest in the world. At least in the Parbhani district of Maharashtra, gasoline prices have already passed the century mark. Before refilling their tank, the local drivers put their cap on the pump, much like cricketers do after a century!
For the past three years, the accumulated excise duty on fuel taxes between the center and the states has been a whopping 14 billion rupees. In the next year the center will collect 3.2 billion rupees alone. Ordinarily, a portion of this collection would have returned to the States under the finance commission’s recommended apportionment formula. By changing the mix, ie collecting more in the form of a non-divisible tax and less in the form of a divisible union excise tax, the center takes advantage of a greater proportion of the fuel taxes. Next year, of the total budgeted fuel tax of Rs 3.2 billion, only Rs 7,000 billion – or about 2.1 percent of that amount – will be shared with states, as analyzed by Business Standard’s Abhishek Waghmare.
This trend of collecting more through levy and less through excise tax has continued for some time. Of course, the state governments will also levy additional state consumption taxes and VAT. Recently, Assam decided to cut state excise taxes on gasoline and diesel by 5 rupees per liter, which will mean a loss of nearly 80 rupees per month for the state. While this may have been done with some electoral considerations in mind by the ruling party, not all states – whether heading for elections or not – can afford to forego excise taxes. Especially when the center deliberately reduces the shareable component through Cess activism. The Finance Commission has also raised concerns about this. As such, the center already owes a large portion of the unpaid GST compensation to the states.
High fuel taxes have an impact on the total cost. They make trucks and logistics more expensive and thus increase transport costs. This affects everything – from the price of vegetables, eggs and milk to the price of cement, fertilizer, chemicals and everything else. Even the drinking water supplied by the nightly water tankers is becoming more expensive thanks to fuel taxes. Telecommunications towers across the country burn more than two billion liters of diesel annually to give us uninterrupted telecommunications service. This is because they get electricity from diesel generators. These costs will also give up.
Higher fuel costs also creep into the cost of services. Headline inflation could rise if fuel taxes rise uncontrollably. The government cleverly compensates for a decline in international crude oil prices by increasing domestic excise taxes. It is a fiscal stroke of luck. This is the golden goose. However, retail prices for pumps are still hovering around 90 or 100 rupees per liter. It gives the illusion of low and stable inflation, but a full tank in a motorcycle now makes you rs 1,000 poorer.
The public is getting used to it. Of course, we are staring at a yawning budget deficit of Rs 12 billion for this and the next pandemic year that needs to be funded. How do I find resources to fill this gap? Gasoline and diesel taxes are an easy target. However, the government should be aware that these taxes are a form of indirect tax that pinches the poor, the low and middle income people much more than the rich. It is a regressive tax, not a progressive tax like the income tax or capital gains tax, which puts a relatively higher tax burden on the rich. This exacerbates income inequality. At a time when stock market wealth is growing, benefiting the richer segment, it seems grossly unfair to continue to impose higher excise and levy taxes on the poor. The government must find a better way to finance the deficit than relying on ever-increasing excise taxes on a consumer item.
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Ajit Ranade is an economist and writes on the wheels that make Mumbai work – money and the economy
(Disclaimer: The views expressed here are from the author.)