DNA Edit: Festival Respite

Under enormous pressure to cut back on fuel prices, the Central government blinked and reduced the basic excise duty on branded and unbranded petrol and diesel by Rs 2. Reportedly, the Finance Ministry was not on board initially with this move, but agreed to it after engaging in discussions with the Petroleum Ministry on bringing down the prices of petrol per litre to the Rs 60-65 bracket.

While the government is claiming that it took this decision to “cushion” the impact of rising international prices of crude oil, the fact that the decision has been taken in the run-up to the Gujarat elections is not lost on anyone. What’s more, this is a move that was necessitated by political expediency.

Rising petrol and diesel prices, which went as high as Rs 80/litre for petrol in Mumbai and Rs 60/litre for diesel in Delhi, were hurting the political capital of the BJP and inflation was fast becoming a bogey on which the Opposition was unleashing one salvo after another.

If petrol and diesel prices would have been left unrestrained, BJP would have faced additional flak for contributing to a cheerless, inflation-marred Diwali. On that front, the government might have dodged a bullet.

However, retaining reduced excise rates does not have the trappings of a blueprint for revenue generation. In fact, by effecting this excise cut, the government has been forced to swallow a bitter pill and suffer a revenue loss of Rs 13,000 crore for the remaining part of the fiscal year and Rs 26,000 crore for the full year i.e., till next October. There seems to be some relief for the government in the offing as many commodity markets experts are estimating a fall in global crude oil rates.

If it so transpires, as experts are predicting, the exchequer will once again be able to laugh all the way to enriched coffers as it did in the first three years of this regime. However, if the predictions of commodity experts turn out to be wrong, as they have been in the past, then the government will have another fiscal mess to handle in a macroeconomic environment that is spiralling towards a slowdown.

The excise duty cut will also marginally reduce the inflow to state coffers, given that they impose VAT on both the fuels on an ad valorem basis. Currently, states impose a VAT in the range of 25-40 per cent on petrol and 15-25 per cent on diesel. To add to the woes of consumers, a number of states have dramatically increased VAT levied on both the fuels. For instance, Kerala has bumped up its VAT from 26 per cent to 34 per cent, while Maharashtra has raised it to the incredible level of 47 per cent. Irrespective of the VAT levied, the revenue generation of states will take a beating, and the states will now be forced to find new avenues to bridge the imminent revenue deficit.

However, the nub of the issue remains unresolved. The gradual rise in petrol and diesel prices is a consequence of the policy that decontrolled oil prices and permitted oil marketing companies to “correct” the under-recoveries on petrol and diesel. This policy must be revisited.