Given how rapidly global oil prices are rising—they rose over $6 per barrel (Brent crude) between just April 22 and May 22—and the possibility that the spiral will continue given the Iran sanctions and the concerns over Venezuelan supplies, it is hardly surprising the chorus for an excise duty cut is rising by the day. And while there is no doubt the Opposition is contributing to fanning protests, when Rs 19.48 of the Rs 76.87 per litre retail price of petrol (in Delhi)—and Rs 15.33 of the Rs 68.08 per litre diesel price—is accounted for by excise duty, it is quite natural to argue that the Centre must cut its taxes. While the central government may just cut rates—it did by Rs 2 per litre in October when crude was at around $57 per barrel, and petrol at retail was Rs 70.83 in Delhi, and diesel at Rs 59.07—this is really missing the point.
For one, it is important to keep in mind that the central excise rate is an absolute, or specific, number, and does not change when the price of crude goes up or down. VAT rates by state governments, on the other hand, are ad valorem and so states get an unexpected bounty every time crude oil prices rise or the rupee depreciates. An analysis by FE for just four states, from January 1 to May 21, found that states are just raking it in. In the case of Delhi, for instance, the oil/rupee movement has meant that VAT realisations are up Rs 1.4 per litre on petrol and Rs 1.2 on diesel; for Tamil Nadu, petrol VAT is up Rs 1.7 per litre and diesel by a whopping Rs 4.2. As a result, given the daily quantity of petrol/diesel used in these states, Delhi is seeing its daily VAT revenues rising by Rs 1.2 crore and Tamil Nadu by Rs 9.4 crore in comparison with January 1. Surely it is more justified to ask the states to drop their tax rates, more so because their revenues are not going to be impacted—Tamil Nadu, for instance, can drop diesel taxes by over Rs 4 without it making any difference to its budgeted collections. Given how many states the BJP is ruling, either on its own or in an alliance, though, the ball is still probably in prime minister Narendra Modi’s court.
It is equally important to retain perspective on why the central government excise rates are what they are today. When the NDA came to power, the economy was quite fragile and, as a result, private investment had dried up significantly, and the central government coffers were also in bad shape. Thanks to the bonanza created by falling oil prices, Modi took a bold decision not to pass it on to users, and used the money to both stabilise the budget as well as to significantly step up government capex. So, road building rose from 4,260 km in FY14 to 9,829 km in FY18 and railway capex from Rs 67,432 crore to Rs 131,000 crore in the same period. Other ambitious plans such as free health insurance for 10 crore families and MSP-based returns for farmers also need budget funding this year. An excise cut along the lines of that made in October will generate a lot of goodwill for the central government but its impact in terms of higher deficits and lower government spending mean that the net impact will be negative.