Fuel taxes debate: Raj dharma or opposition dharma?

February 25, 2021 5:30 AM

The price of lower fuel taxes is losing revenue that funds welfare projects. The poor will lose from any move to cut fuel taxes

According to 2015-16 NFHS report, just 6% of households own cars and 38% own two-wheelers.According to 2015-16 NFHS report, just 6% of households own cars and 38% own two-wheelers.

By Bhamy V Shenoy

Retail petrol price in India has exceeded Rs 100 per litre in some states. This is being written as ‘fuel prices touching historical highs’, though it has no consequence. However, rising fuel prices have given opposition political parties ample opportunities to follow their “opposition dharma” by organising protests. Participating in one such protest, Congress president Sonia Gandhi has written a letter to PM Modi about why he should consider lowering fuel taxes to follow “raj dharma”.

While analysing what has been written as part of raj dharma, it is useful to consider what the UPA government did during their rule. When we compare the crude oil prices during the six years of the NDA II, they were 62% of the price during the ten years of UPA, and not 50%, as claimed in the letter. Besides this minor exaggeration, there are many such misleading statistics and unfounded critique of higher excise taxes, as shown later. It is worth stating that I am neither a Modi bhakt nor an opponent of any political party—just an energy economist and environmental activist.

It is true that during the NDA II regime, petrol prices have been higher. On average, they have been higher by 37%. So, who are the beneficiaries of this largesse? Certainly not the common man, for whom every political party vows to work for. Let us examine who this common man is.
According to 2015-16 NFHS report, just 6% of households own cars and 38% own two-wheelers. Four-wheelers account for 36% of petrol consumption, while two-wheelers for 62% and three-wheelers for 2%. This clearly shows that only the middle-class and the rich will be affected by the petrol price increase, and most can manage.

When it comes to diesel, we have similar statistics. According to Nielsen’s report for PPAC, the transport sector represents 70% of diesel consumption. The remaining 30% is from the non-transport sectors—agricultural use (mostly for tractors and pump sets) accounts for 13%, industry for 9%, power generation and others for 6.5% and mobile towers for 1.5%, etc. The owner of a tractor or an industrial company is hardly a common man.

Petrol and diesel consumption discussed above clearly shows that “common man”, who owns no four- or two-wheelers, or a common farmer, who consumes little or no diesel, is not affected. Those who use public transportation will be affected when diesel prices go up, and the government should consider assisting them.

The rich and upper-middle-class, who pay income tax, are affected when tax rates go high. But, do politicians or media get agitated by income tax rates? Why then the opposition dharma of protest against fuel taxes? They are needed for welfare projects (Ujjwala, health insurance, building toilets, MGNREGA, etc) and managing the fiscal deficit below the target to reduce inflation. Here also, Gandhi is factually wrong when she argues about rampant inflation. Based on CEIC, Bloomberg, and Elara Securities Research, inflation during the last five years of UPA was around 10%, based on CPI; it was less than 4.8% during the NDA years.

In the FY22 Budget, fuel excise duties provide for Rs 4.7 lakh crore, while personal income tax collection is pegged at Rs 5.6 lakh crore—a significant amount that no fiscally responsible government can afford to cut when the fiscal deficit is estimated to be 6.8%. Petrol and diesel products were sold below-cost during the UPA era, incurring huge losses to public sector oil companies. They also issued subsidy bonds to be paid by the future government (now the NDA). Did the common man benefit from such generosity?

NDA has increased excise taxes on petrol from Rs 9.48 to Rs 32.9, and on diesel from Rs 3.56 to Rs 31.83. However, as argued by Sonia Gandhi, total revenues collected during the six-and-half years from these two is not Rs 21 lakh crore, and is at best around Rs 14 lakh crore. By any stretch of the imagination, this tax cannot be claimed as “profiteering”; no one terms income tax/GST/customs duty as profiteering.

Some countries do indeed sell petrol below cost. They are oil-exporting countries—often ruled by autocrats or dictators. To ‘pacify’ citizens, they buy goodwill by selling below cost. In Venezuela petrol costs Rs 1.45 and in Iran Rs 4.50. On the other hand, there are 41 countries—both developed and developing—where petrol is sold for more than `100/litre. Each country has its political compulsion, and India need not be influenced by their pricing policies, including that of our neighbours, where petrol is cheaper.

There is the unintended benefit of higher petrol price resulting in the faster adoption of electric vehicles. This will result in the reduction of GHG and help India’s fight against climate change. As reported in FE, more consumers are looking for electric vehicles who want to exchange ICE bikes.

Amid increasing opposition to higher fuel prices, FM Nirmala Sitharaman, has managed to convert this into a zero-sum game between states and the Centre by arguing that it is a ‘vexatious’ issue. According to her, there is a need to discuss higher fuel prices and how the reduction can be shared between the states and the Centre. This is rather strange reasoning coming from the FM.

No one, including the rich, would like to pay taxes. This was proven by a recent survey of 22,000 respondents by LocalCircles. At the same time, it has added to the confusion. Headlines give the impression that 51% of citizens are cutting spending to cope with fuel prices. However, a deeper look at the survey reveals that such a conclusion is erroneous. This is another example of how even the “fact”-based analysis can give misleading news since the sample does not represent India’s population.

Though a strong and convincing argument can be made to justify higher fuel price from economic and environmental points of view, it will be finally decided on political expediency. Already, some poll-bound states have cut their state taxes. But who will suffer? As argued in this article, it is the common man who pays either through higher inflation or losing welfare projects. The rich and middle class will again be the winners.

The author is Former manager, Conoco, and former board member of the national oil company of Georgia. Views are personal

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