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Will politics trump economics on petrol-diesel pricing?

LiveMint logoLiveMint 20-09-2017 Tadit Kundu

High prices of petrol and diesel are the new political hot potato. Opposition parties are attacking the government for not passing on the benefits of low crude oil prices to consumers. They have a point. Current price of one litre petrol in Delhi is more or less similar to what it was in January 2014. The big difference, however, is that the current Refinery Transfer Price (RTP) is only 60% of what it was during January 2014. RTP is the price component attributable to crude oil prices and exchange rate. Centre’s current excise duty earnings per litre of petrol are more than twice of what they were in January 2014.

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The fact is that the Modi government has used the windfall of decline in global oil prices since mid-2014 to raise its tax revenue. The central government has raised the excise duty on petrol and diesel nine times since November 2014. Thus, Centre’s tax revenue from petrol and diesel rose from 0.44% of GDP in 2013-14 to 1.44% of GDP in 2016-17.

Over the same period, the central government’s fiscal deficit went down from 4.5% of GDP to 3.5%. Thus, the entire reduction in fiscal deficit under Modi government can be attributed to increased taxes on petrol and diesel, as was discussed in a previous Plain Facts column. Mint has described this government’s strategy of using low oil-prices to strengthen the fiscal situation as a prudent move.

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Alphons Kannanthanam, a newly-inducted minister in the government has justified such a policy by saying that only the rich are affected by higher petroleum prices. The poor do not own cars and two-wheelers, he said. The Bharatiya Janata Party (BJP) is arguing that tax earnings from petroleum products are being used to fund spending on welfare and infrastructure projects.

Available data does seem to vindicate the minister’s statement. National Sample Survey Office (NSSO) household-level survey for 2011-12 shows that the rich spent more on petrol and diesel, both in absolute terms and as share of total household spending. Such findings have also been used to argue in favour of dismantling fuel subsidies, on grounds that they are often cornered by the rich.

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Although inflation has reversed its downward trajectory, there is no need to press the panic button right now. Risks of spike in international oil prices appear slim, as the global crude oil market is likely to remain in surplus going ahead. Besides, political differences among key Opec members—Saudi Arabia and Iran—will most probably hinder the cartel’s ability to raise oil prices.

A macroeconomist would not find much fault with the government’s petroleum pricing policy. Things could be very different on the political front though. It is possible that the growing clamour against high petroleum prices is a manifestation of a more general dissatisfaction with the overall economic environment. The economy has been subjected to two back-to-back disruptions in the form of demonetisation and goods and services tax (GST). Informal sector, which employs a majority of people, has suffered the most. Investment scenario continues to remain bleak. The opposition is increasingly trying to corner the government on the economic front.

Economists might be still be in favour of using low crude prices to increase tax collection. But the jury is still out on the political fallout of such a strategy.

The BJP itself had made high petroleum product prices into a huge political issue against the United Progressive Alliance-II government. It is no wonder that the petroleum minister is promising lower petroleum prices in the near future.

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