Finance minister Arun Jaitley is quite right to dismiss the chorus for a cut in central excise duties on petrol/diesel and to characterise this as a “trap” designed to “push India into an unmanageable debt.” After all, of the impressive 1.5 percentage point increase in the tax-to-GDP ratio since the NDA came to power—from 10.1% in FY14 to 11.6% in FY18 and a projected 12.1% in FY19—almost half (0.74% of GDP) came from the increase in petrol/diesel excise duties. Had this not taken place, the NDA’s FY18 fiscal deficit would have been 4.24% of GDP, not too different from what it inherited from the UPA in FY14.
Indeed, as Jaitley adds, while one of his predecessors—P Chidambaram—said the Centre could cut its taxes by `25 per litre, “he never endeavoured to do so himself”. And, as this newspaper has pointed out before, while the central government has a fixed excise duty, the state governments have an ad valorem VAT that rises each time oil prices do—an analysis by FE last month found that Delhi earned `1.2 crore extra every day from the costlier petrol/diesel while Maharashtra earned `7.1 crore, West Bengal `2.4 crore and Tamil Nadu `9.4 crore.
And not only did the government do well to spend this money on increasing capital expenditure in areas like roads and railways—critical for boosting GDP, given the stagnating private investment—it has also tried to compress expenditure on major subsidies from 2.2% of GDP when it came to power to 1.4% in FY18. While it did well to reduce petroleum subsidies and to reduce duplicate ration-card holders, though it missed an opportunity to raise issue prices in ration shops when the opportunity arose.
Fiscal discipline, though, goes beyond this. The proposed MSP-based deficiency payments scheme, when it comes into being, could cost over `1 lakh crore—0.53% of GDP—and is a direct result of the government’s inability to reform agriculture markets enough to ensure farmers got reasonable prices for their produce. A large part of the responsibility for this, it is true, has to lie with state governments, but most of these are run by the BJP or its allies. In the case of PSUs, similarly, the government has failed to privatise even one unit, it left the Air India sale too late and did not even make enough of an effort to ensure its success either. Had its entire debt been taken over by the government, for instance, Air India would have been profitable—and the extra cost of this would have been equal to the losses the airline will make in the next 3-4 years which will have to be funded through the budget anyway. In the case of MTNL and BSNL, whose combined losses are similar to those of Air India, similarly, the delay in privatising means the government has to get ready to make large equity infusions and shoulder the losses.