For the past week or two, the opposition parties have been attacking the government over rising petrol prices. The central argument of the whole debate is that if the crude oil prices are down by 50 percent since May 2014 then why the retail prices of petrol and diesel have not come down. The opposition wants Modi government to lower the taxes on petroleum products, but the finance minister Arun Jaitley has repeatedly ruled out to do so.
However, while the opposition is busy in making most of the current situation, the past actions of these very opposition parties reveals that they too never shied away from milking the low crude oil prices to fill their treasuries.
In his latest weekly column in Indian Express, P Chidambaram, the former finance minister said, “We have a greedy government that believes in tax and spend”. But what he conveniently chose not to mention is that the Congress-led Karnataka and Himachal Pradesh governments increased their VAT rates at the time when the oil prices were as low as $35.
During the same intervening period, Aam Aadmi Party leader and Delhi’s finance minister Manish Sisodia increased the VAT rate from 20 percent to 27 percent, instead of passing the benefit to consumers as their party members now demand from the Centre. The second hike by the AAP government came in January 2016 when the oil price was at its lowest level $30.
And these happened despite the fact that the VAT is calculated in percentage and not in absolute. So, if the centre hikes the excise duty on petrol and diesel, the state governments would make more money in the same VAT rates. Interestingly, when these parties were raising the VAT rates, the state units of the BJP took to roads to mark their protests.
So why do all parties have double-standards?
The reason lies in the sources of their revenue. Taxes on petroleum products alone form about 15 percent of the total money that the Indian government generates in a year. In case of state governments, the contribution of these taxes varies from 8 to 14 percent of their total revenues depending on VAT rates and petrol products consumption. Plus, the states have an additional share of 42 percent in the excise duty collected by the Centre makes at its level.
So while parties may protest the high petrol prices when they are in opposition, they all play by the same rules after coming to power. Hence, when the finance minister Arun Jaitley was asked to cut the excise duty, he asked the opposition parties to first cut down their VAT rates in their respective state governments.
But does this still justify high petrol prices?
Well, it depends on how one looks at it. Mr Chidamabram suggests that if the centre reduces excise duties, it would benefit the economy via lower subsidy expenditure on kerosene and LPG, and cheaper fuel for the public. While what he said holds true, it may not be the best way to gain most from the low oil prices.
First, the benefits of lower subsidy expenditure or lower fuel costs by government departments are anyway being realised in another form: higher revenues (chart below).
Second, while the fuel prices have come down marginally, passing on all the benefits to consumers may not be the best decision. The mint report, substantiated with the NSSO household survey 2011-12, informs that it is the rich who gains more from the cheaper fuel/subsidy as one-third of our population anyway spend less than Rs 100 a month on petrol or diesel. So, by increasing taxes, the centre and state governments could distribute the benefits of low oil prices equally among the citizens.
And this is evident in the case of Centre. The additional revenues generated over the past three years have helped India to reduce its fiscal deficit from 4.5 percent to 3.5 percent of the GDP. And, unlike the earlier times, the fiscal gap reduced with no cuts in expenditure. Instead, the key sectors such as agriculture, rural development and infrastructure witnessed more fund infusion. This approach also seems better because the private investments have remained low in the intervening period.
Third, for many years, the government subsidized the petroleum products for consumers and the government-owned oil marketing companies (OMCs) suffered heavy losses. If the vehicle owners received the bonus then, they should not complain if the government earns extra money today.
After all, the money earned by state or the Centre is not being pocketed by politicians; it channels back into the system to fund the infrastructure and public welfare programmes from which all citizens benefit. The only difference is that benefits from the latter are not as visible.
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