Bad politics, bad economics

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Petrol and diesel prices, which are ruling at record levels, are hitting the common man hard and damaging the economy. The surge in global crude prices and the falling rupee value have made imported oil costly but government policy has made the consumer bear the main burden of the spike. Even when crude oil touched $147 a barrel after the 2008 global economic crisis, petrol and diesel prices in India were about Rs 50 per litre and Rs 35 per litre, respectively, thanks both to subsidies and low taxes and cesses at the time. After the recent spurt, when crude prices are in the region of $80 a barrel, petrol and diesel prices are about Rs 80 and Rs 70, respectively. Domestic fuel prices were never this high even when crude prices were above the $100 range, mainly because the taxes were not high. The major components of the prices are the taxes imposed by the central and state governments. The union government gets nearly Rs 20 as excise duty per litre of petrol and the states on an average earn 35-40% VAT. It is slightly less in the case of diesel. 

These taxes should be lowered to bring down the prices of petrol and diesel. But that does not mean getting back to the scheme of administered prices, which is not good economics. Fuel prices can be kept low to maintain macro-economic stability and to minimise the cascading effect on the economy without dismantling the market-determined mechanism. It was the Narasimha Rao government that first conceived the dismantling of the administered prices mechanism. The UPA deregulated petrol prices and put diesel prices on a gradual path to market levels. The Narendra Modi government completed the task. But both the Modi government and the state governments have since treated oil as a cash cow to mop up additional revenue. The Centre kept fuel prices high through high excise duty even during four years of low international crude prices. It raised excise duty nine times to earn revenue to meet fiscal targets and reduce current account deficit. But these were not the original aims of moving to a market-determined price mechanism.

Besides lowering taxes, there are other options. Instead of keeping the prices artificially high, the government, in consultation with states, should bring fuel price under the GST. This will keep the tax impact at a uniform and maximum 28% and keep prices at a realistic level. The Centre and the states together earn over Rs 2 lakh crore revenue annually from oil. There are several other ways to make up for the reduction in taxes and the resulting loss of revenue. The government should explore them, instead of burdening the captive common consumer who has no defences and cannot avoid the taxes. 

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Bad politics, bad economics

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