Pandemic and Petrol Prices: Double whammy for honest tax payers!


(Dr R K Chadha)

The pandemic 2020 and the rocketing fuel prices 2021are a double whammy for the honest tax payer who had very high hopes from the present ruling dispensation.  While the countrymen appreciate the important steps taken by the government in tackling Covid-19 pandemic in the country and at international level, the patience will wear off soon on the economic front, if not checked.

The government will be best served if they take immediate steps to stem this perception of insensitivity towards the common man otherwise their detractors are waiting to pounce on them and take political mileage.  Further, no amount of blame game or lame excuses beyond a limit will placate the people of this country who expect the leadership to show the same vigor as shown while addressing the other key issues in recent times.   History is replete with instances where governments had fallen on simple issues concerning day-to-day lives of the Indian people like the prices of onions or even sugar.

The hotly debated topic these days is “why prices of petrol and diesel have crossed Rs.90 mark and reached Rs.100 in some districts of Rajasthan when the crude price in the international market is around US$60 a barrel?”

In March 2020 when the lockdown was announced by most of the countries including India due to Covid-19 pandemic, the prices of the crude oil fell to its lowest level going down below US$20/barrel due to drop in the demand.  Taking advantage of the low price of crude in the international market and anticipating fall in revenues and increase in expenditure to take care of people, the government hiked the excise duty on fuel to garner additional revenue.

The excise duty was raised in March 2020 by Rs 3/litre for both petrol and diesel followed by a very steep hike two months later in May 2020 by Rs 10/litre and Rs 13/litre on petrol and diesel, respectively.  Earlier, Rs.2 a litre hike in excise duty was also introduced in July 2019.  Not lagging behind, the state governments too, hiked sales tax or VAT on petrol and diesel.  A total increase in excise duty of Rs.15/litre in petrol and Rs.18/litre in diesel and steep hikes in VAT in different states in less than a year are the primary reasons for rocketing prices today, in spite of crude oil prices in the international market being quite stable.

The actual tax revenue on petrol and diesel in FY20 was Rs.2.2 lakh crores and was budgeted for Rs.2.48 lakh crores in the FY21.  But, on account of the steep hike in excise duty on both petrol and diesel, the tax revenue went up to Rs.3.46 lakh crores in FY21 and is expected to further go up to Rs.3.7 lakh crores.  So, the government tax collections went up by 50% if one looks at the budget estimates of FY20.

In July 2020 prices of crude started rising to US$40/barrel and reached the present level of US$60/barrel as lockdown started lifting in stages.  This increase in prices reflected the optimism and expectation from the roll out of vaccine for Corona virus, and also due to restoration of international movement and increase in economic activity, thereby increasing the demand for crude oil.

Another factor for price rise is that all oil producing countries have been much disciplined with their crude production.  They have mostly maintained the cuts they made during pandemic period to keep the prices somewhat elevated.  Saudi Arabia even announced that they would cut their crude production by 1 million barrel a day through February and March 2021 to keep prices elevated.

In India, the taxes collected on petrol and diesel are the highest across the major cities.  For example, in Delhi the price of petrol from refinery gate to the dealer is around Rs.32/litre.  Added to this is the excise duty of Rs.33/litre which is more than the actual price.  On this, about Rs.21/litre is added by the state government on account of VAT.  This makes the taxes in Delhi to be around 170% of the basic price of the petrol.  This is mirrored across many cities in the country.  Like in Mumbai VAT is higher than any other state and hence the higher cost of petrol.

At present taxes accounts for about 60% of the pump prices on petrol in Delhi in particular. This is largely comparable to some of the highly developed economies like Germany and Italy where they account for about 62-65%, but are significantly higher than countries like Japan where it is 45% and the United States of America they are around 20% of the pump price.

As the economy is picking up and conditions are creeping back to normalcy, people had great hopes that the cuts in excise duty on petrol and diesel will be announced in the Budget 2021. But all hopes were crestfallen and a new agriculture infrastructure and development cess was added with a little tweaking in the tax structure.

This has imposed additional burden on the honest tax payer and a common man who is already reeling under the impact of Covid-19 pandemic, while the central government has more than made up its shortfall in GST and other indirect tax collections during this fiscal.  The people in the country are left high and dry and feel betrayed.

Prime Minister Narendra Modi spoke of the burden on middle class due to over dependence on crude oil import and suggested more reliance on green technology. Nitin Gadkari advocated use of electrical vehicles to reduce the impact.  This is easier said than done.  While such suggestions are positive and welcome, we have to be aware of the ground realities and take concrete steps in consultation with experts in the appropriate fields rather than expressing general views.

If India is aiming at a GDP growth of 8-10% pa to reduce poverty and unemployment, then dependence on oil import cannot be wished away as the energy demand will bound to increase.  Today, 50 lakh barrels/day are being imported, which may most likely to go up to 90 lakh barrels/day in the next 20 years, if we aim at such a high growth.

In geological sense, India is not as blessed as Saudi Arabia and other Gulf countries, or some African countries, Russia, Kazakhstan and other central Asian republics in terms of oil reserves.  We do have reserves which meet around 20% of our energy needs from oil fields in northeast India, Cauvery basin and Bombay High.  The government should make a strong pitch towards oil and natural gas exploration in the country to discover new oil fields and develop modern technologies to enhance oil recoveries, which are at a much lower level in India in comparison to other oil producing countries in the world.  Unfortunately, the budget allocation to the oil industry in India has remain constant to the tune of about Rs.42,000 crore for the last two years.  There has been a drastic fall in fund allocation in the last few years from Rs.80,000 crore, approximately.

Graduating to electric vehicles is a good step in terms of reducing consumption of petrol and diesel and being environment friendly.  But, again the point is generation of electricity which is mostly dependent on coal at 68% and hydroelectric power at 22%.  All other sources like nuclear power, solar, windmill and other renewable resources form the rest 10%.  Solar and windmill are climate dependent and can never replace other sources of power generation.

Nuclear power is one alternate clean energy source.  France is a good example where atomic power share exceeds 70% of the electricity production, the highest in the world.  Electricite de France (EDF), the main electricity generation and distribution company, which is substantially owned by the French government with 85% share holding operates 56 atomic power plants.  The disposal of nuclear waste is one concern at present, which will be overcome in near future with innovation in recycling technology

Government should make serious efforts in setting up Atomic Power stations in the country by building up on the foundation of 123 Nuclear Agreement with the US as we have good relations with them and a strong Indian leadership.  But, this need speedy action as setting up a nuclear power plant needs at least 7-8 years of establishment.  Meanwhile, Fast Breeder technology needs strong support along with exploration of strategic minerals like uranium and thorium in the country, which can reduce dependence on enriched fuel from Nuclear Supply Group (NSG).

As the total energy needs of the country are bound to increase in the next 20-25 years, government should prioritise its resources and evolve strategies on home front as well as at international level.  As oil is an international commodity, its prices will remain same for all countries, at best good relations of India with oil producing countries may get a few concessions in rates or in credit conditions.

Very soon India will overtake China as the largest consumer of crude oil in the world.  We should leverage this advantage to assert our position as oil producing countries also depend on buyers to run their oil industry. Indian companies should invest in a big way overseas in newer oil fields and bring crude oil to our country at lesser prices.

On the tax front, the government’s approach of moving away from direct to indirect tax regime has stressed the common man.  They have chosen to put extra burden on middle class and the poor in comparison to wealthy and rich by reducing the corporate tax substantially, on one hand and increasing the excise duty on petrol and diesel on the other.  So, when a poor person buys a litre of petrol he pays the same tax as a rich person pays!!  The tax regime needs rationalisation of tax structure in favour of poor and the needy.

India is an uneven economy where 77% percent of the total national wealth is held by the top 10% of the population and 1% of the richest hold over more than four-times the wealth held by 953 million people, who make up for the bottom 70%.

While it is understandable that governments have to keep the business class happy as they depend a lot on funding from them, they have to strike a balance and should adopt a Robin-hood approach.  This approach envisages taxing the rich and the super rich class more and lessening the burden on the common man by minimizing their tax component.  This will be a progressive step and will create some balance in our uneven economy by reducing the inequalities in the wealth distribution.

At present the government tax policy looks to be regressive.  They should bring back the wealth tax on super rich which was abolished in 2015 and replaced with a 2% additional surcharge levy.  This class can easily afford both.  A relook on the corporate tax and income tax is also needed so as to benefit the lower strata of the society.

Lastly, “Why not petrol and diesel are brought under the much acclaimed and revolutionary GST brought by the government?”

This is a question which neither the central nor the state governments are interested to answer.  Central government is happy as taxes under GST boost its coffers directly which they need not share.  State governments are happy because this is the only source of revenue left to them after the GST implementation as they lost their power to levy any other taxes.

Now, the state governments are solely dependent on central government for funds for welfare schemes which they announce from time to time to derive political mileage.  State expenditure is directly linked to taxes.  If the central government refuse to share their tax component, then their expenditure goes down and they cannot implement their programs for the poor.  Above this the state governments are not allowed to increase their fiscal deficit beyond a limit by taking loans from banks and other sources.  This put them to great disadvantage if their political party is not in power at the centre.

So, what should the people of India do? The exceptional performance of the government in fulfilling its promises on certain key issues in the country, bringing long standing agricultural reforms to benefit farmers, lowering the level of corruption, acting tough against Chinese aggression and enhancing the image of India has made people to repose their faith in the leadership of the country.  They are hopeful that Prime Minister Modi will bring much needed economic relief to them by lowering taxes on commodities of common consumption and reviving the economy.  Over a billion people in the country await their Robin-hood to act!