Modi – government has shown enormous fiscal rectitude by meticulously managing both its receipts and expenditure thereby sticking to the fiscal consolidation road-map during its tenure. Its efforts are all the more praiseworthy when one recognizes that it has achieved these results without compromising on much needed boost to capital expenditure and funding social welfare schemes.
However, hidden behind this is the oil bonanza made available since mid – 2014 [a wonderful coincidence as Modi took charge around this time i.e. on May 26, 2014] which it has leveraged to its full advantage. India imports about 80% of its oil requirements and therefore, the international price of crude hugely impacts the pricing and resource mobilization from oil products.
The price of Indian basket of crude declined from a high of US$ 107 per barrel in May 2014 to a low of US$ 28 per barrel in January 2016. During this period, central excise duty [CED] on petrol was increased by 120% whereas on diesel, it went up by a whopping 360%. In value terms, the increase in duty on petrol was about Rs 11.7 per liter taking the total levy to Rs 21.5 per liter. On diesel, the hike was Rs 13.5 per liter leading to total of Rs 17.3 per liter.
That helped union government in increasing revenue from CED on oil products by 80% during 2015-16 and a further 35% during 2016-17. The states too increased sales tax/VAT to increase their revenue by 4% during 2015-16 and 16% during 2016-17. In value terms, the center increased its tax collection from oil products from around Rs 100,000 crores during 2014-15 to Rs 250,000 crores during 2016-17. Indeed, this was a great facilitator in achieving the fiscal deficit target 3.5% of the GDP fixed for the year.
Meanwhile, reduction in the price of petrol and diesel was not commensurate with decline in oil prices [courtesy, huge mop up via hike in CED]. Since January 2016, oil has been on a rising trajectory to US$ 56 per barrel currently. With duties remaining unchanged, this led to corresponding increase in the price of petrol and diesel. As a result, the ruling prices prior to October 4, 2017 were around Rs 71 per liter and Rs 59 per liter [in Delhi] respectively.
These prices are closer to the peak levels of Rs 75 per liter petrol and Rs 64 per liter in mid-2014. Without doubt, the consumer has been unfairly treated as he/she did not get ‘proportionate’ relief when international prices decreased and now when, these are increasing, he/she has not got necessary protection by way of reduction in excise duty. It is a case of ‘heads I win and tails you lose’!
Under mounting pressure from the public, the government has now reduced CED on both petrol and diesel by Rs 2 per liter each to Rs 19.5 per liter and Rs 15.3 per liter respectively. It has also requested state government to reduce VAT [it ranges from 26% to 48%] by a minimum of 5%. Even after the duty reduction, the prices will remain high at Rs 69 per liter for petrol and Rs 57 per liter for diesel.
The finance minister, Arun Jaitely and petroleum minister, Dharmendra Pradhan are candid in accepting the anomaly yet, they have argued that hike in CED during mid-2014 till January, 2016 was necessary to keep up social welfare spending besides investment at a time when private investment was sluggish. Since then, the underlying fundamentals have not changed much; hence the reluctance of the government to bring about a significant reduction in excise duty.
Indeed, Modi – dispensation faces a dilemma as every rupee reduction in CED will result in a loss of about Rs 13,000 crores in revenue. So, reduction of at least Rs 5 per liter – needed to fully align the prices with global rates – will make a dent of Rs 65,000 crores in a full year and Rs 32,500 crores in remaining half of current year. This will result in 0.2% slippage in fiscal deficit.
At a time when, following dip in growth during first quarter to 5.7% and expected yearly growth of 6.7% as projected by Reserve Bank of India -down from its earlier projection of 7.3% – and pangs of GST [goods and services tax] at least during first three months from the date of its introduction July 1, 2017, losing revenue from an assured source may not be a prudent idea.
The risk of fiscal de-stabilization, attendant cost in terms of high inflation, high interest etc and compression in productive spending [contingent upon lowering of CED] far outweigh the political cost of high price of petrol and diesel. Hence, there is need for exercising caution. Given the overarching importance of fiscal consolidation, the government should refrain from any further cut in CED at least during the rest of current year till March 31, 2018.
From next year, things would have stabilized on the GST front. About 2 million more businesses have registered under the new dispensation in addition to existing about 7 million who have transited from extant excise/VAT regime. Besides, there are about 1.5 million in small business category [annual turnover less than Rs 7.5 million] who have opted to pay flat tax at prescribed rates viz. 1%/2%/3% for retailers/manufacturers/restaurants while remaining outside GST. So, there will be a substantial accretion to revenue.
Furthermore, the efforts of Team Modi to garner revenue from the hitherto tax dodgers who were forced to deposit their unaccounted income/black money generated in the past – post-demonetization [November 8, 2016] – should start yielding results. This will also add to government’s kitty. The income tax department has detected un-accounted cash deposit of about Rs 300,000 crores. Tax and penalty on this should yield more than this amount.
With these buffers in place, it may then bring about a drastic cut in the excise duty. This may also be a propitious time for removing the ‘zero rate’ rider on crude and natural gas besides petrol and diesel under GST dispensation. To begin with, these may be taxed at 28% [to avoid major disruption] to be lowered to 18% within 1-2 years.
For now, the government may well keep excise duty at existing rate till the end of current year i.e. till March 31, 2018