Cut now

| Updated on May 07, 2018 Published on May 07, 2018

The Centre needs to reduce excise duty on petrol and diesel to ease the burden on consumers

The Centre finds itself caught between a rock and a hard place following the sharp rise in international oil prices over the last several weeks. Pump prices of petrol and diesel are ruling higher than what they were in 2014 despite international oil prices being comparatively lower, sparking demands for a cut in duties and taxes to ease the burden on consumers. Taxes, Central and State put together, effectively account for half the retail price of petrol and about a third of diesel’s. Taxes on petroleum products, specifically the two transportation fuels, are a major revenue earner for the government — the Centre earned as much as ₹2.42-lakh crore while the States raked in ₹1.67-lakh crore from the products in 2016-17. Between November 2014 and January 2016 when global oil prices were in a free fall, the Centre increased the duties on petrol and diesel on nine occasions, passing on only a part of the benefit to consumers. Hence the demand that some of these increases be scaled back now that oil prices are back on the upswing.

The demand is a fair one as fuel prices are beginning to pinch the pockets of the common man. The Centre did cut excise duty on the two fuels by ₹2 a litre each in October last while exhorting the States to follow up with their own cuts in VAT, which went unheeded. The cut was clearly inadequate given the further rise in global oil prices since. With taxes on petrol and diesel accounting for a quarter of its indirect tax revenue, the Centre’s predicament is understandable. However, not cutting duties may have other consequences, mainly on the inflation outlook. The central bank noted in its last monetary policy statement that core inflation remained elevated and but for falling food prices, mainly vegetables, overall inflation would have been much higher. Vegetable prices always rise during the summer, which means that there will be no buffer for inflation there. With fuel prices also rising, household inflationary expectations are bound to go up which could in turn force the RBI to administer a rate hike as early as the first quarter this fiscal. That’s something that the Centre might not find palatable just when growth is beginning to recover.

The one comforting factor for the Centre in this scenario is that GST finally seems to be coming into its own. The bounteous collection of ₹1-lakh crore plus in April seems to indicate that the tax is stabilising, and going forward, could keep the Centre’s cash registers ringing. This should knock off a major source of worry over revenues. All things considered, it may not be a bad move to cut duties on transportation fuels now and ease the burden on the common man. With the elections in Karnataka round the corner, the timing may be opportune politically as well, even as the cut will ensure that there is no upward pressure on inflation from fuel prices.

Published on May 07, 2018
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