As global oil prices continue to surge, the government’s key policy advisor is of the view that states have to take the lead in cutting duties while the Centre needs to first find the fiscal space before it can slash taxes on fuels.
As global oil prices continue to surge, the government’s key policy advisor is of the view that states have to take the lead in cutting duties while the Centre needs to first find the fiscal space before it can slash taxes on fuels. Speaking to The Indian Express, Rajiv Kumar, vice chairman, Niti Aayog, said: “The states must cut their taxes because they have got ad valorem (percentage-based) taxes. As the prices have gone up, they have been getting a windfall gain, which can hardly be continued. So they must reduce it below 27%… a 3-4 percentage point cut is doable. The central government must find the fiscal space and then cut the excise duties.”
The Union government, Kumar said, has to ensure that it doesn’t do anything to weaken the nascent uptick in the economy, and simultaneously find enough fiscal space to absorb the higher oil price by attempting things not done in the past. These steps include ‘smarter disinvestment’, including the sale of the government’s stake in Specified Undertaking of the Unit Trust of India (SUUTI), which could result in inflows of Rs 50,000 crore, he said.
“On the one hand, we don’t want higher oil prices to result in entrenched higher inflationary expectations and, on the other, it is also undesirable to let your fiscal balance deteriorate. And this is what I meant by smart macroeconomic management. A one-rupee cut in excise duty on oil prices results in a central government revenue loss of Rs 13,000 crore a year. It’s a a daunting number but at the same time we have to explore if there is sufficient revenue buoyancy and possibility of higher non-tax revenues,” Kumar said.
The Centre is currently working out a solution with ONGC to announce a cut in diesel and petrol prices, wherein the upstream oil major could be directed to sell its crude oil at below ruling international prices by capping the price for the entire fiscal year. ONGC supplies an estimated 20% of the country’s total crude oil requirement to refining and marketing companies IOC, HPCL and BPCL.
On Wednesday, the Kerala government announced plans to cut the levies on fuel by Rs 1 effective from June 1, marking the first instance of a cut in taxes on fuel. On the impact of the reversal of low oil prices — a big tailwind for the economy during the last four years — on macroeconomic stability, Kumar said: “The fact that the tailwind has disappeared must make a difference to the economy but more so for economic management. Now therefore the time has come for much smarter macroeconomic management, and I think that is where the government must rise to (the occasion) as it were, on how to handle the current situation so that growth doesn’t stall, fiscal balances do not worsen.”
Even as key Opec driver Saudi Arabia and Russia have indicated their intention to keep oil prices trading around levels of $80 to a barrel, analysts predict that a new shutdown in Venezuelan output could soon force crude futures to zoom toward the $100 a barrel mark. “We have to look for solutions within more restricted parameters now than what you had before. My own belief is it is certainly possible. After all, we have grown at 8% even at times when oil prices were around $120 per barrel, though at the same time inflation was rising which was not in order. But there is no reason to believe that growth cannot be maintained with oil prices where they are,” Kumar said.
“The most important aspect here is that for the real economy, for the investor, for the producer, for the consumer, the oil prices did not decline. So all the impact that happened (of low prices) was at the government level, in the public economy, the private economy continued to live with the oil prices that were there prior to that. So, in some sense the supply side response that you are looking for or the consumption demand, should still be there,” he said.
Even as GDP growth figures issued by the Central Statistics Office Thursday showed that the ongoing recovery strengthened in the last quarter of 2017-18, there are concerns over whether the rebound can be sustained amid surging oil prices. Kumar said there is a need to distinguish between the state of the public economy and state of the private economy.
“And the private economy is finally beginning to gather strength and the private demand and private investment are on an upturn. That will continue,” he said. “The government has to make sure that it doesn’t do anything to weaken that upturn in an attempt to protect the public economy. And there I think the critical factor is whether we find enough fiscal space to absorb the higher oil price by doing things which we may not have done in the past, for example, much smarter disinvestment, SUUTI (stake sale), it gives you Rs 50,000 crore right there. This is where smarter, more responsive, less reactive, more forward looking macroeconomic management will help. All this can be managed and there is no reason to believe that there are trade-offs which are insurmountable,” Kumar said.