Why Arun Jaitley's fuel price cut is bad economics
Barely few months ago, oil and finance ministry vehemently argued against any excise duty cut in fuel because it was not fiscally wise. They wanted states to take the lead. In fact, in an interview to India Today, petroleum minister, Dharmendra Pradhan, explained how tweaking of tax rates by the government would not make much of a difference and how the Centre was negotiating with the states to reduce taxes.
“Three major factors decide crude oil prices. International crude oil prices are linked to geopolity, fluctuation in the exchange rate as well as the tax structure of respective states and the Centre. For a visible difference (in prices), all three factors need to be complementary. For instance, if international oil prices keep going up and we tweak the taxes, it will not bring any benefits. The government is very sensitive about the spending behaviour of the common man and we did reduce excise duty in October last year; some states even reduced taxes. All states have their own spending patterns and developmental commitments. We have to strike a fine balance among all aspects,” Pradhan said in an interview to the magazine in June this year.
In several off the record conversations, government officials had also claimed that Rs 2 per litre reduction would impact revenues by Rs 28,000 to Rs 30,000 crore. At a time when the Goods and Services Tax (GST) collections have clearly not kept pace with expectations, GST revenue collection for September crossed Rs 94,000 crore falling short of the one lakh crore target per month set by the government.
On top of that, the government is clearly struggling to meet its disinvestment target of Rs 80,000 crore, just 11 per cent of the target has been met so far – about Rs 9,220 crore has been raised through disinvestment – to bring in excise duty cuts doesn’t seem like sound economics which could further put pressure on India’s macro fundamentals that are already under pressure because of escalating oil prices.
Macro stability and fiscal prudence have been the hallmarks of this government, investors have taken solace in the fact that the NDA has been conservative and not indulged in fiscal profligacy — it also got lucky with benign oil prices through much of its term. Considering the crisis brewing in India’s shadow banking industry, public sectors banks in the news for bad loans and plotting with scamsters and the rupee in a free fall mode –the only consolation was fiscal prudence of a government that had resisted pressure until now to succumb to populist demands and rightly so. Finance minister Arun Jaitley is hoping that this cut would spur demand which would boost the economy.
“This is perfectly good economics... we want consumers to spend money on other items also... to do it without impacting the fiscal deficit is surely good economics,” he was quoted as saying in a press conference.
Jaitley announced a Rs 2.5 cut in per litre price of diesel and petrol and asked state governments to announce a matching reduction. The minister said the Centre would reduce the excise duty by Rs 1.5 per litre while oil marketing companies would absorb the rest Re 1 per litre.
The Economic Survey had identified rising oil prices as one of the biggest risks to the Indian economy stating that it would crimp real incomes and spending. India greatly benefited from low oil prices for three years, perhaps, it could have created a fund to soften the blow for consumers when the times were good.