Petrol, diesel price down by over Rs 2: Consumers want deeper cut but govt in tough balancing act on revenue

New Delhi: The government is making a virtue of cutting basic excise duty on petrol and diesel ahead of Diwali, and just ahead of crucial state polls, but we should not forget a simple fact: While excise cut has been a mere Rs 2 per litre on both fuels, the hikes since the Modi government came to power have been far higher. Between November 2014 and January 2016, excise duty on petrol and diesel was raised as many as nine times. In all, duty on petrol was hiked by Rs 11.77 per litre and that on diesel by 13.47 a litre in 15 months, when the roll back is just Rs 2 a litre. The hikes helped government's excise mop-up more than double to Rs 242,000 crore in 2016-17 from Rs 99,000 crore in 2014-15. This also meant the household budget of the aam aadmi went for a toss. So, the duty cut now is a relief for the aam aadmi and would surely dent the government’s fiscal math, but the roll back is by no means substantial.

For better perspective, here are some more numbers.

Excise duty on petrol and diesel was Rs 9.48 and Rs 3.56 a litre respectively before the Modi government took office. These went up to Rs 21.48 and Rs 17.33 a litre, respectively. This means duties on petrol were more than doubled while those on diesel were increased almost four times from the May 2014 level, The Indian Express report said. Recently, a newly sworn minister went on the offensive, wondering if those people who can afford to buy scooters and cars are starving and whether they really cannot afford expensive fuel. His statement was a continued justification around the petrol price math that the government has been doling out in large measures. Duties (central and at state level) on petrol and diesel earn the government a large portion of its revenue and it makes prudent economics to keep prices high through levies even when the price of international crude is soft. Never mind the household economics of the aam aadmi.

Representational image. Reuters.

Representational image. Reuters.

So, the sudden about-turn in this socialist-era philosophy is just that an about-turn brought on by intense criticism on social media and by the Opposition parties and surely with an eye on the impending state polls. Which is why there is little virtue in first justifying the continuous hikes and then doing a partial roll back. Though the government claims it will set back revenue collections by Rs 13,000 crore in the remaining part of this fiscal, what it gets you and me is scant relief in fuel prices. And the consequent cooling off in inflation. If the government indeed wants to tackle inflation, there should be further reduction in excise duty on these two fuels.

According to a report by CNBC-TV18, after announcing the basic excise duty cut, the Centre has begun pushing state governments too to cut value added tax (VAT), which should further reduce prices of these two fuels for consumers. The report said the Centre has also asked companies to cut the prices, with government officials indicating that a price cut of Rs 5 per litre on petrol and diesel is likely. As of today, the cuts announced are just Rs 2.50 per litre for petrol and Rs 2.25 for diesel and not a single state government has announced any reduction in VAT so far.

Whether the Rs 5 cut happens and, if it does, what this means for margins of oil marketing companies remains to be seen. Besides, if the state governments were so amendable to Centre’s prodding, would they not have agreed to bring petrol and diesel under the Goods and Services (GST) regime where the duty incidence would have automatically reduced significantly? This NDTV report gives details of city-wise prices of petrol and diesel after the duty cut, effective today.

On microblogging site twitter, some users lampooned the government’s move to cut excise by just Rs 2 per litre.

Finally some relief to middle class, but it is too little & too late.

This user said “#diesel Increase the price of Diesel by Rs.4 and then decrease it by Rs.2, Makes a huge difference. I guess is their role model.”

Rs.2 reduced for #PetrolDieselPrice! Now I will buy a Mercedes wth th money saved! Thank you @narendramodi @arunjaitley

Anyway, the petro price math is not tough to understand. Excise duty collections from high speed diesel (HSD) and petrol or motor spirit (MS) sales constitute 84-87 percent of the overall excise tax collections of the government, according to a report by Integrated Research and Action for Development titled ‘Converging the divergence between diesel and petrol prices: A case for rationalisation of the Central Excise Duty’. This means 20 percent or about a fifth of the government’s total tax collection comes from the taxes you and me pay to buy one litre of petrol or diesel. Why would the government then consider lowering these taxes and thereby significantly impact its own tax receipts, unless it wants to indulge in populism?

Here’s another number. As much as Rs 4.4 lakh crore was generated last fiscal by the government through various taxes and levies on petrol and diesel. The Centre accounted for 62 perent or two-thirds of the total revenue through such levies. Also, any change in the excise duty on these fuels would anyway impact the VAT states levy. According to CARE Ratings, as of July 2017, central taxes on these products range from Rs 21.5-Rs 22.7 per litre for petrol and 17.3-19.7 per litre for diesel. Additionally, there are state taxes which vary for petrol from 20 percent in Mizoram to 48 percent in Maharashtra (Mumbai). In case of diesel they vary between 12 percent in Mizoram and 38 percent in Madhya Pradesh. While the central taxes are on the basis of per litre (specific) , state taxes are ad-valorem and would tend to increase the final retail price when the base crude oil price changes. Any change in excise duty rates will affect the price on which state VAT/ST is levied and impact state VAT collections (VAT/ST is a state subject).

Meanwhile, though citizens continue to be unhappy with the quantum of price reduction in petrol and diesel, the government would not have it easy in the remaining part of the fiscal since the revenue dip would be significant. In a note to clients, analysts at Kotak Institutional Equities said this morning that the government’s excise cut by Rs 2 per litre will cause it an estimated loss of around Rs 13,000 crore for the rest of the fiscal year and will also cumulatively reduce the gross revenues by around Rs 41,000 crore which is 0.25 percent of GDP, including around Rs 28,000 crore lower surplus transfer by the RBI. “We pencil in FY2018 GFD/GDP at 3.5 percent unless the government reduces expenditure to a similar extent. Given economic growth prospects, it will be challenging to curtail expenditure”.

Updated Date: Oct 04, 2017 12:24 PM

Also See