A negative stimulus
The price of petrol crossed ₹100 per litre in Delhi on July 7; it is now more than ₹100 in all metros. It is true that crude prices have increased significantly over the last one year. The average price of Brent crude has increased from $43.3 per barrel in July 2020 to $75.29 on July 7. However domestic taxes, especially the ones imposed by the Union government, are also to blame. Of the ₹98.87 per litre cost of petrol in Delhi on July 1 (latest date for which price data is available), the price charged to dealers and their commission accounted for only ₹43.15 per litre. Union excise duties and state value-added tax contributed ₹32.9 and ₹22.82 per litre respectively. The actual tax component, once customs duties are included, will be higher.
Both the Union and state governments raised taxes on petroleum products when international crude prices crashed due to the pandemic last year. This was a wise thing to do back then. Other sources of revenue collapsed due to the 68-day-long national lockdown, imposed to curb the spread of the pandemic. But since crude prices were lower, the retail price burden did not increase. Neither of these conditions holds anymore. The Union government has been claiming that the economy is recovering. Crude prices have risen significantly, leading to a sharp spike in prices, pushing inflation and economic distress. Contrary to perceived wisdom, rising petrol-diesel prices do not just impact the rich. A 2014 petroleum ministry survey shows that 60% of petrol is used by two-wheelers. The price of diesel has a cascading impact via transportation cost and cost of cultivation in agriculture.
With the prevailing uncertainty around the OPEC+ deal on increasing crude production and surging demand in advanced economies, oil prices are expected to remain high, even rise further. So, unless the government decides to bring down taxes, there will be even higher retail prices, surging inflation and greater economic hardship. The government might be tempted to not cut taxes due to revenue considerations. However, it will do well to realise that its current fiscal approach is tantamount to a negative fiscal stimulus, as high petroleum prices are squeezing household budgets. This will generate headwinds for both future growth and tax collections. Cutting taxes on petrol-diesel to bring down prices at the moment is not just good politics, it is good economics as well.
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