India’s manageable fiscal deficit position may not be long-lived as rising crude oil prices will curb the cushion of hiking excise duty on petroleum products, according to the Economic Survey 2016-17.
The Survey notes that increase in the tax to GDP ratio of about 50 basis points in each of the last two years, owing to the oil windfall, will disappear in the coming financial year. It also states excise-related taxes will decline by about 10 basis points of GDP, a swing of about 60 basis points relative to financial year 2017. Of the R2.3-lakh-crore excise revenue estimated in FY17, roughly a third is attributable to the hikes in excise duties on petroleum products. One basis point is one-hundredth of a percentage point.
The benefits of falling crude oil prices since 2014 did not percolate down to consumers but the government certainly thrived. Starting 2014, excise duty was hiked nine times, which translates to a tax collection from diesel and petrol from 0.4% of GDP in financial year 2013-14 to 1.1% in financial year 2015-16.
In real terms, as the Survey notes, since June 2014 excise duties increased from Rs 15.50 per litre to Rs 22.7 per litre as of December 2016 for petrol and Rs 5.80 per litre to Rs 19.70 per litre for diesel. During the same period, crude oil prices fell from around $104 per barrel to $53 per barrel. Petrol prices, through various changes, though remained flat at Rs 71.41 per litre in New Delhi in June 2014 to R68.94 in December 2016, and diesel prices from Rs 57.28 per litre to Rs 56.68 per litre during the period.
The Survey emphasizes that the increase in petrol tax in India has been over 150% in India, and in contrast the governments of majority of advanced countries passed on the benefits to consumers making India outperform among all countries except those in Europe in terms of tax on petroleum and diesel.
Between financial year 2013-14 and financial year 2015-16, gross fiscal deficit narrowed from 4.5% of GDP to 3.9% of GDP, a fall of 60 basis points, much of which could be attributable to collection from excise on diesel and petrol.
However, crude oil prices are on the rise and are expected to stabilise at about $60-65 per barrel, a lid at which shale gas effect is expected to kick in, in the next financial which may dampen growth as the import bill will swell.