How rising oil prices have put Modi government in a bind
India’s economy is held hostage by two external factors, both of which are not under government control — the monsoon rains and global oil prices. The fluctuating levels of either — or both — dictate how the Indian economy will perform in a given year.
What the government can control, however, is taxes. Less than two years after the Modi government took office, crude oil prices slumped from over $100 a barrel to less than $30 a barrel. While prices of petrol did drop initially from an average of Rs 71 in 2014 in Delhi to Rs 65, it was not commensurate with the fall in international prices.
Meanwhile, the government steadily raised excise duties on petroleum products. For a litre of petrol, duty was raised from Rs 9.48 in May 2014, when Modi took over, to Rs 19.48 a litre now. Duty on diesel, too, rose from Rs 3.56 a litre to Rs 15.33 currently.
As a result, the government raked in a windfall. Revenue from excise duty on petroleum grew from nearly Rs 1 lakh crore in 2014-15 to as much as Rs 2.42 lakh crore in 2016-17 and helped the regime fund numerous welfare schemes. But the consumer got no relief despite the fall in global crude prices. To add to consumers’ woes, states have steadily increased value added tax or VAT on fuel to shore up their respective revenues as well.
Central and state taxes now make up nearly 50 per cent of the cost of fuel. So while oil companies supply petrol to dealers at Rs 38.09 a litre in Delhi, consumers pay Rs 77.72 per litre. Compare that to Pakistan where consumers pay just Rs 49 per litre of petrol. The mismatch continues when you look at the rest of the subcontinent — a litre of petrol costs Rs 58.67 in Sri Lanka and Rs 69.63 in Bangladesh.
Oil prices are now climbing back to what they were in late 2014 and the government’s financial calculations have been hit. Finance Minister Arun Jaitley based his budgetary formulas on crude oil prices remaining at roughly $55 a barrel. With oil prices now hovering at over $70 a barrel, Indian oil companies must fork out an extra Rs 2 lakh crore. Consumers who now have to pay much more are complaining vociferously. In Mumbai, for instance, the price of a litre of petrol has gone up from Rs 70 in 2016 to Rs 85 today. If the high prices of fuel have sparked some alarm on Raisina Hill, it is only because elections are looming large and the BJP fears alienating its core voter base — the middle class.
Our cover story this week, written by deputy editor MG Arun, looks at how rising oil prices have caught the government in a bind. If it reduces the price of fuel, its revenues will fall drastically and it would have to cut back on its ambitious welfare programmes.
A raft of measures are now being contemplated to reduce the burden on the consumer. These include bringing fuel under the GST to reduce taxes and negotiating cheaper crude buys from OPEC countries. Unfortunately, long-term measures to wean the Centre or the states from their addiction to oil taxes or exercising genuine fiscal prudence are not being talked about. What the government should be doing — what I’ve been advocating since the NDA came to power — is to reduce the size of the bureaucracy and cut out any wasteful non-welfare expenditure. The government does not need some 51 ministries to run India. There are several fiefdoms among them which have outlived their usefulness in the new liberalised India.
Realistically, of course, this is unlikely to happen in an election year and, as always, it is the Indian taxpayer who bears the burden of government profligacy.
(India Today Editor-in-Chief's note for cover story, Death by Oil?; June 18, 2018.)