The oil prices have put the economy on flames. Rising inflation may not reflect in statistics but it is impacting prices of commodities. It is at the centre of debate and discussion.
The urban voters are judging the policies on the basis of rising market prices and petrol, particularly diesel, are considered the villain. Are rural voters not concerned? They are. Farm input and output costs have increased. Again it is affecting urban plate. Rural voters are often less vocal. They speak in nuances but act firmly.
So would it become a political issue? Possibly it is becoming but people are confused whether the taxing the fuel is prudent or has an alternative or not.
The government says that they are losing revenue, again it is debatable, because of GST and it has to be made up by continuous and multiple taxing of fuels.
In fact, fuel taxing has many dimensions; including raising “cess” for the highways, expressways and rural road construction. This is Rs 8 per litre against the previous Rs 2 per litre. It raises collection annually from around Rs 33000 crore to Rs 1.13 lakh crore a year. (This is in addition to other taxes collected that was at Rs 88,600 crore in 2013-14).
The argument in the budget was that since excise collections would be lost due to GST, petro products be additionally taxed. It is difficult to say whether it is good economics. In fact, regimes that put high taxes suffer in popularity and affect the well being of the society.
Officially, every government remains stoic on inflation. It is even argued to be a common phenomenon. It forgets that any banker or economist considers inflation as undesirable as it hits the government, being the largest consumer, the most. Inflation makes budgetary projections awry.
The governments often at such points make stringent rules. It professes that to counter the exigencies people must cope up with difficulties and that means be prepared to pay higher taxes to rescue the government – “a duty of the citizens”. The various tax and law and order machineries become oppressive. It adds to corrupt practices in the society. It is common knowledge that rates of various agencies have increased manifold and vasoolis are widespread.
According to the finance ministry, 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. In the last fiscal the collection was Rs 2.016 lakh crore. These collections stabilised the fluctuating GST collections in the indirect tax kitty.
Now when international prices remain around $ 80 a barrel the prices have crossed the limits when it was around $ 120 per barrel four years back. The reasons are definitely higher taxes and cess.
A Crisil research says that owing to falling value of rupee and expecting oil to stabilize around $ 70, the import bill is to be about Rs 6.5 lakh more in 2019, about 26 percent more.
Does it mean that the government is in trouble? Yes. It has to mop up far more money. It is saddled with the issue of the US sanctions on Iran. This means India have to look for about 12 percent of its import from elsewhere.
India is trying to settle it with Iran through rupee payments. The sanctions, Indian government circles agree, are irrational and they are wondering why India’s supposedly better relations with the US are not helping them.
A shift in global policy may be an imminent need. It may take time as Russia is also being similarly tormented through sanctions.
It may be observed that Indian currency has become a difficult performer since the world has become unipolar. Taking the rupee to its actual and desired level is being manipulated by international players. It is strange that many countries, smaller than the size of the smallest Indian state, have “stronger” currencies. India, now over a two trillion dollar economy, and the sixth largest economy, needs to look at this aspect.
In the immediate context, the government should bring down the prices by rational pricing. Fuel should not be taxed heavily. Despite growth, it is a fledgling economy and high taxes apart from adding to the costs also create distances as it affects travel, transport and production. It makes even food grain production uneconomic and adds to farm distress.
Ultimately it is a tax on the country’s growth.
Excise duties have risen significantly since 2013-14, accounting for 22 to 25 percent of the retail prices of petrol and diesel respectively, compared with 12 to 15 percent earlier, Crisil study says.
There is a window. The government can use it. The price of domestic oil production is linked to international prices. While that can have some sense, it is a skewed policy. The production cost of Indian crude is far less than the international prices. But production is falling for the last seven years. It has slumped to 32 million metric tons in July 2018 from 38.1 million metric tons in 2011-12.
The average cost of production is around $ 40 a barrel almost half of the international prices. But ONGC and other oil companies make phenomenal profit selling it at international prices. This is unethical. Should it do so?
India imports 195.7 million ton crude. Approximately, domestic production is 20 percent.
The oil companies can create a new Indian price by putting the Indian crude price at about $ 2 more than production cost that is at $ 42 per barrel. This could reduce the actual oil price of the entire imports by about 20 percent.
But this has also to be backed up by cut in taxes. If this methodology with some minor differences could be adopted it could be a great lubricant for the economy. Immediately without a loss, prices of petrol can come down to around Rs 60 a litre.
It is not happening because somehow the budge word in Indian commerce is high profits. All oil companies are rolling in profits though the country is reeling under high petro prices. The PSUs are supposed to make reasonable, that does not mean high, profit so that the people – the real investors – also benefit. Instead the contrary is happening and bleeding the people and economy.
Lower oil prices had dramatically improved India’s terms of trade in 2015-16, thus boosting India’s gross domestic product (GDP).
India needs rational policy to reset the prices. If it is done the politics would also change for the better.
(By Shivaji Sarkar. Views expressed are personal)