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  1. Don’t rue high petrol, diesel taxes. That money is coming back to you as much more

Don’t rue high petrol, diesel taxes. That money is coming back to you as much more

The increased government expenditure, especially towards building roads and railways, would eventually come back to the public as being much more beneficial, accounting for the multiplier effect.

By: | Published: September 15, 2017 1:31 PM
There’s a growing demand from several sections of the society to cut taxes on petrol and diesel, which aggregate to as much as over 100% in some cases. (Image: Reuters)

The clamour over rising petrol and diesel prices has grown to a fever pitch over the last few days, with TV news channels running stories of hurting consumers interests all day long, and senior politicians, including BJP’s own Subramanian Swamy, also raising voices in favour of controlling rising fuel bills. Indeed, retail fuel prices are hurting, and the daily minor increments have seemingly failed to hide the overall jump over the last few weeks, what with the news media, FE Online included, bringing it prominently to the notice of the people.

Crude shock

Amid the continuing rally, the retail fuel prices have hit three-year highs in several cities across the country. The price of petrol in Mumbai has risen to Rs 79.50 per litre, a level last seen in August 2014 in the country’s financial capital. Similarly, the price of diesel is at a three-year high in the metro cities of Kolkata and Chennai at Rs 61.40 and 61.87 per litre respectively. Since July 1, petrol price in Delhi has risen by Rs 7.34 per litre to Rs 70.43 per litre today (Friday, 15 September, 2017), broadly in line with the over 12% rise in the prices of the Indian basket of crude oil in rupee terms during the same period.

Also read: Petrol, diesel prices at three-year highs and climbing; have you felt the pinch yet?

While the government has sought to explain that retail fuel prices are linked with the global crude oil prices and international markets, there’s a growing demand from several sections of the society to cut taxes on petrol and diesel, which aggregate to as much as over 100% in some cases.

Public spending

Oil Minister Dharmendra Pradhan was non committal on any such move, when asked earlier this week, saying that the high tax collections from retail fuel sales have helped the administration spend on infrastructure and welfare of the people. Albeit, he favoured moving petroleum products too under the ambit of GST.

Also read: Government won’t intervene to cut petrol, diesel prices

Well, there seems to be enough evidence for Dharmendra Pradhan to back up his comments. The government expenditure has indeed risen over the last three years. The Financial Express wrote in its print edition this morning that while it’s easy to portray the government as tax-grabbing and not allowing consumers to benefit from lower crude oil prices, it is the sharp rise in oil revenues that allowed the big rise in government’s capital expenditure when most other growth drivers have all but collapsed.

Money multiplier

While the Centre has pushed up the excise duty on petrol by almost 150% since July 2014, it has also increased its capital expenditure. The Centre’s capital expenditure in the last financial year 2016-17 rose by a about a quarter, or by Rs 66,543 crore, from the previous year. In the previous financial year 2015-16, it rose by Rs 57,335 crore. Similarly, while the states increased their oil revenues by Rs 29,561 crore in FY17, they also raised their total expenditure in the year by Rs 2,63,900 crore.

Further, higher taxes on petroleum also helped keeping the fiscal deficit under control at the same time, else the signal to bond markets would have raised interest costs and negate a part of the increased government-capex. The increased government expenditure, especially towards building roads and railways, would eventually come back to the public as being much more beneficial, accounting for the multiplier effect. Although, it would be interesting to see how much of the increase in the government income from oil sector is actually being put to productive use through capital spending, and is not being frittered away on revenue expenditure.

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