Rising fuel prices: Cosmetic changes won’t help

The excise duty cut declared by the Centre on petrol and diesel from the midnight of October 4 by Rs 2.50 per litre, with the Centre bearing Rs 1.50 and the oil marketing companies (OMCs) the balance one rupee in a litre of the fuel sold, seems to be a desperate bid to soothe the frayed feelings of consumers.

The central government, which had been unrelenting in enhancing excise duty as many times as it could when the global crude prices were on the wane during the last couple of years, could no longer resort to this tack when the prices began soaring in recent months, putting into trouble every user of this vital input for mobility.

Finance minister Arun Jaitley, who reaped the excise duty-driven oil bonanza to bring down fiscal deficit, is now in an unenviable predicament because on the one hand, the soaring cost of imported crude would drive the trade deficit to dizzying levels, with imports accounting for more than 80 per cent of domestic consumption. On the other, the threat of expensive imported oil could wreak havoc on the cost-push front on all other items. It is a fact to reckon that India remains the world’s third largest oil consumer with little to show by way of conservation or shift to alternative fuels to cut its inordinate dependence on imported oil.

But inevitably, inflation is the cruellest form of taxation and the finance minister’s position in the penultimate year before the general election to rein in price rise would mostly make or mar the prospects of his government’s return to power.

It is rather ironic that the finance minister who claimed with braggadocio that the NDA government was true to the letter and spirit of promoting cooperative federalism by providing 40 per cent of devolution of funds to the Centre, is now appealing to the states to match the Centre’s gesture in cutting fuel prices through their value-added tax (VAT).

No doubt a few BJP-ruled states have immediately complied with his request, but a majority of them remained indifferent to his appeal as they have limited options to tax, unlike the Centre with its armoury of additional resources mobilisation measures to tap round the year.  

For the Centre, which is garnering more than Rs two lakh crore purely from excise levy on fuels, a sacrifice of Rs 21,000 crore may not materially alter its fiscal position, unlike the states that do not have the luxury of shifting taxes to other items to make up for the cut in VAT on fuels.

Hence governments sit over the appeal lest they lose their ability to pamper people with pet-free schemes in an effort to garner valuable votes to remain in power — be they farm loan waivers, free distribution of goats, cycles or grinders or any other trinkets to make them believe they are being governed by a more caring government.

In politics, optics count and nobody is concerned about the cost of lost growth, mediocre wages and lower tax receipts as a fall-out of a lax fiscal policy, with most of them being in a make-believe world in the absence of any qualitative governing class.

Did Prime Minister Narendra Modi not claim the other day that the Indian economy was “progressing rapidly”, that it would soon overtake the United Kingdom? But Britain, caught as it is under the agonising spell of Brexit, with no tangible plan to stay competitive, has once again deferred the planned Pound 2 per litre rise in fuel duty, which has remained frozen since 2011-12.

Comparisons may be odious but to reject tax revenue for electoral considerations is not a sane course and to persuade states to follow suit is folly compounded. There were reports that the Prime Minister held a meeting after a week when the government announced a gratuitous small tax cut on auto fuels, but that was mostly to focus on how to make do with the likely fall-out of continuing imports from Iran, a country blacklisted by the permanently petulant Donald Trump beyond November 1, when the latter’s formal sanctions against Iran kicks in.

Another point to ponder is that prices of petrol and diesel were made market-determined by the government effective from 2010 and 2014 respectively with the OMCs being accorded the leeway for taking the all important pricing decision based on market trends. But being a majority shareholder, the government has not given up its penchant to intervene selectively to ask them to defer price rise during elections to state assemblies or appealing to them to share its burden whenever prices hit the roof.

Meddling with market mechanism, even occasionally, has the risk of bringing down the value of these blue chip companies because market discipline does not respect authority’s appeal or intervention, going as it does by its own ineluctable logic.

It’s time the authorities learnt some hard lessons from fluctuating fuel prices and conduct forward planning without fostering any distortions, which have a nasty habit of entrenching themselves, much to the detriment of the declared market economy model the country has been pursuing in other sectors to bring about competition and to get the real price and value for the ultimate consumers.

At the end of the day, without laying out alternative plans to conserve fuels, it is important to encourage more public transport by citizens and make available other sources of non-conventional energy to run the arterial transport system smoothly.

(This article was originally published on DNA. Read the original article)

(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)