Prices of petrol and diesel prices are at all-time highs on the back of rising crude oil prices and a depreciating rupee. While this will undoubtedly lead to a rise in prices of a host of goods, the Union government must desist from trimming excise duties on auto fuels. The finance ministry has reportedly indicated it doesn’t intend to lower levies at this point, citing fiscal considerations. This couldn’t have been an easy decision given the pressure from the opposition parties, and it is to the government’s credit that it has not yielded to their demands. Indeed, given how the rupee is fast depreciating—it was at a record low of 71.97 to the dollar in intra day trades on Wednesday—and crude oil prices remain elevated, macro-economic stability should be the government’s priority. So, it can’t afford to fall short on oil revenues.
It is surprising, however, that no demands are being made of the state governments to drop duties on petrol and diesel. Indeed, as FE has argued in the past, the states never seem to be sharing the load with the Centre. As is known, the Centre levies a fixed excise duty on petrol and diesel—Rs 19.48 per litre on petrol and Rs 15.33 on diesel—while state governments stand to gain when crude oil prices rise since they administer an ad valorem VAT. In FY18, while the Centre’s excise revenues on oil products fell 5.6% due to its cut in excise duties, the states’ VAT revenues rose by 10.6%. A back of the envelope calculation shows that the Delhi government alone now makes an estimated extra Rs 1.66 crore per day from taxes on petrol and diesel alone compared to what it earned at the start of 2018. States where the consumption is higher make stand to gain even more. In fact, even though four states—Maharashtra, Gujarat, Madhya Pradesh and Himachal Pradesh—lowered VAT rates following a cut in excise duties by the Centre last September, their revenues have continued to go up. If the common man is to get some relief, therefore, it must come from the states.
Also, apart from the need to keep fiscal balances in check, it is important to note that a large part of the additional spending done by the Union government on infrastructure like roads and railways—in the absence of private investment, it is the sharp hike in central government investment that is driving the economy—is funded by petroleum taxes. It is easy for the opposition parties to demand a cut in taxes and claim high central levies are hitting the common man, but the taxes are critical for retaining the economy’s momentum. Since state governments are raking in extra money anyway, in contrast, a cut in VAT rates will not hurt their fiscal balances.