Reality check: Can Modi cut petrol price by Rs 25 a litre, as P Chidambaram claims

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Updated: May 23, 2018 6:59:24 PM

Petrol prices in India are touching a fresh lifetime high every day. So are diesel prices. The fuel prices are on fire due to rallying crude oil prices and higher taxes. Could Narendra Modi government really cut petrol price by Rs 25 a litre as P Chidambaram claimed?

Can Modi really cut petrol price by Rs 25 a litre?Petrol prices in India are touching a fresh lifetime high every day. So are diesel prices. (Image: Reuters)

Petrol prices in India are touching fresh lifetime highs every day. So are diesel prices. The fuel prices are on fire due to rallying crude oil prices, which adds up on top of the already high proportion of taxes.

The Narendra Modi government gained significantly from 2-year-long oil windfall, which allowed them to raise excise duty on fuel nine times. Now that oil prices are again surging, the chorus for reducing taxes has grown — so much that former finance minister and senior Congress leader P Chidambaram called for a cut of Rs 25 a litre in taxes on petrol. But economists say it is not possible.

To begin with, the Narendra Modi government has a fiscal deficit target of 3.2% for the fiscal year 2018-19. And moreover, the government did not budget the risks of rising crude oil price in the Budget 2018. “Rising crude oil price, in itself, is going to have an impact on government’s fiscal deficit. On top of it, an excise duty cut is going to bloat it to at least 3.5%,” Anjali Gupta, Chief Economist at PhillipCapital India, told FE Online.

Where did the money go?

The Narendra Modi government has tried to contain the fiscal deficit below 4% and targeted to bring it down to 3.2% this fiscal year. A report by CARE Ratings said that in the 2016-17, 62% of government’s total tax revenue came from excise duties and crude oil cess and customs, which is understood to have helped the government bring down the fiscal deficit in last four years.

Fiscal deficit from FY11 to FY19

“Could they have done some balancing act when oil prices were low? Yes. But they can do it now too. The government can give some cushion while still trying to stick to the fiscal deficit target. Otherwise, it is going to have an impact on the financial sentiment,” Anjali Gupta added. The government on Wednesday said that it is still deciding on the long-term solutions on rising fuel prices.

Is subsidy sharing on the plate again?

The government freed petrol price from its control in June 2010 and began deregulating diesel in October 2014. Until June 2015, the government subsidised India’s oil refiners and marketers such as Indian Oil, HPCL and BPCL. It asked oil producers such as ONGC to share the subsidy burden, but stopped after that as global oil prices plummeted. But the risk of them (oil producing companies) being asked to once again bear a part of the subsidy is looming with the recent rise in international oil rates, Moody’s said in a report.

What about states?

In October last year, when crude oil price was hovering around $60 a barrel, the government did announce a cut of Rs 2 a litre in excise duty on both petrol and diesel. Despite government’s request, only four states followed up with a cut in the retail VAT on fuel prices.

What’s interesting is while excise duty being levied per litre is absolute and does not change with the price of crude oil, VAT levied by states is ad valorem. It which means that when oil prices rise, states coffers get more revenue from VAT levied on fuel prices.

Bring them under GST!

In the current scenario, there could be a strong case for bringing petrol and diesel under the GST, CARE Ratings said in a report. “With the sharp recovery of crude oil prices globally and with the increase in the prices of the auto fuels, the inclusion of petrol and diesel under the GST will help in rationalising the prices of these auto fuels,” it said. If petrol and diesel are brought under GST, it will lead to a 10% and 20% reduction in effective tax rates respectively for petrol and diesel, it added.

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