Given the fast pace of vaccination and substantially diminished effect of COVID-19, the GDP is expected to register growth close to 10 per cent
On November 3, 2021, the Union Government notified reduction in central excise duty (CED) by Rs 5 per liter on petrol and Rs 10 per liter on diesel. Seen in isolation, these cuts may appear to be significant. However, when viewed in the backdrop of the unprecedented increase affected by the Narendra Modi Government ever since it assumed office, this is small.
In May 2014, the CED on petrol was Rs 9.8 per liter whereas on diesel it was Rs 3.8 per liter. As on November 2, 2021, it was Rs 33 per liter on petrol — a cumulative increase of Rs 23.2 per liter. On diesel, it was Rs 32 per liter — higher by Rs 28.2 per liter. The cuts notified on Nov 3, 2021, have offset only 1/5th of the hike on petrol and 1/3rd on diesel.
The hike in duties has adversely impacted the economy by way of increasing prices across all sectors (all the more because increase in diesel price leads to higher cost of transportation), eroding the purchasing power of common man, undermining competitiveness of the industrial and services sector and increasing the cost of implementing welfare schemes such as making food available at subsidized rate. But, looking at things in isolation won’t be fair.
We need to consider as to how the extra revenue from duty hike was put to use. Of the Rs 23.2 per liter increase in CED on petrol, Rs 13 per liter was given effect during 2020 alone (Rs 3/- in March and Rs 10/- in May). In case of diesel, of the Rs 28.2 per liter hike, Rs 16 per liter was done in 2020 (Rs 3/- in March and Rs 13/- in May). During FY 2020-21, the economy was devastated by the COVID pandemic leading to contraction in GDP (gross domestic product) by 7.3 percent.
As a result, the Union Budget suffered a double blow.
While, on one hand, there was a drastic reduction in receipts (gross tax receipts or GTR was about Rs 400,000 crore less than the target) on the other, the expenditure of the Government increased sharply to cover both life/health and livelihood needs. Major heads where its expenses zoomed included food subsidy: Rs 500,000 crore; fertilizer subsidy: Rs 134,000 crore; MGNREGA: Rs 111,000 crore; health: Rs 94,000 crore. Besides, it had to maintain high capital expenditure - revised estimate (RE) for the year being Rs 439,000 crore.
Consequently, the fiscal deficit(FD) during 2020-21 was 9.5 percent of GDP or Rs 1850,000 crore in nominal terms. This was despite the Centre collecting Rs 335,000 crore from CED on petrol and diesel alone (during 2019-20, tax collection from these products was Rs 180,000 crore). Imagine, if CED were to be less by Rs 5/10 per liter on petrol/diesel, i.e. same quantum as the cuts affected now, the collection would have been lower by at least Rs 100,000 crore.
This would have affected schemes for protecting the life/livelihood; alternatively, Government would have been forced to increase the FD to 10 percent or Rs 1950,000 crore which would also entail heavy cost by way of macro-economic instability, rating downgrade, high interest rate, increasing debt, inflationary pressures and so on. Clearly, reducing duty cannot be an unmixed blessing all the more, when other revenue streams are drying up as happened during 2020-21.
During the current year, given the fast pace of vaccination and substantially diminished effect of COVID, GDP is expected to register growth of close to 10 percent. As a result, the GTR is likely to exceed the target by about Rs 200,000 crore. On the expenditure side, food subsidy may not be very much off the mark though fertilizer subsidy could exceed the target by at least Rs 40,000 crore (courtesy, steep increase in the international price of fertilizers).
The resulting budgetary cushion will help in absorbing the revenue loss from the recent cut in duties — estimated to be about Rs 65,000 crore in the remaining five months of the current fiscal.
Twenty-five State Governments have also reduced VAT (value added tax). This together with cuts in CED should provide substantial relief (for instance, Rs 20 per liter on petrol in Karnataka). Yet, there is clamor for more; some even wishing that CED goes back to the level existing prior to 2014. Even this should be possible if only overall tax revenue picks up say, monthly GST collection going up to Rs 150,000 crore on a ‘sustained’ basis. Till that happens, both the Centre and States will need to act in a calibrated manner.
However, to focus on reducing taxes alone won’t help in reining in oil prices. Let us look at some numbers. In Delhi, the pump price of around Rs 104 per litre (as on Nov 3, 2021) includes ex-refinery price plus freight (ERP+F) of Rs 47/-, dealer commission of Rs 4/-, CED, Rs 28/-and VAT, Rs 25/-. Even if, CED and VAT are completely withdrawn (theoretical), the consumer will still pay Rs 51/-.
In the break-up of pump price, ERP+Falone is Rs 47/-. This corresponds to the international price of crude oil at $85 per barrel. Being a function of the global demand-supply balance, the price of crude can go to any level; for instance, in the first quarter of CY (calendar year) 2012, it had touched a high of $125 per barrel. If, that scenario were to repeat, the ERP+F would be Rs 69 per liter. Plus, dealer commission, the pump price will be Rs 73 per liter even if the Centre and State don’t charge any duty.
Considering that India depends on imports for 83.5 percent of its crude requirements, there is a high probability of our having to pay such a high price. Indeed, this is where the shoe really pinches. There is an urgent need for promoting self-reliance in oil production.
A recent directive of the Union Government to Oil and Natural Gas Corporation (ONGC) to transfer 60 per cent of the operating rights in the Bombay High and South Bassein region (nearly 50 percent of India’s oil production comes from these two areas) to a multinational oil company (MNC) is a good move as this will help in fully utilizing the potential of this prolific area. That apart, there is an urgent need to put in place a ‘stable’ and ‘conducive’ policy for attracting investment and increasing indigenous production.
Another important aspect has to do with economy in the use of fuel and improving energy use efficiency — a potent way of moderating demand. In fact, the current high price should signal consumers to make necessary moves in that direction. India being the third largest importer of oil, a lower Indian demand can also contribute to lowering of the international price of crude.
Finally, at present, marketing of petroleum products is the monopoly of public sector undertakings (PSUs). Out of 70,000 petrol pumps in the country, they account for 90 percent. There is need to bring competition by increasing share of private sector which will help reduce price by lowering the margins of firms.
(The writer is a policy analyst. The views expressed are personal.)
