The finance ministry’s current economic survey indicates that today’s oil market is very different from a few years ago, in a way that imparts a downward bias to oil prices. Indians reading the survey will be left wondering why this new paradigm hasn’t shown up in their lives. International crude oil prices may have halved since the Narendra Modi government assumed office, but it has made practically no difference to the consumer. This anomalous situation encapsulates a misguided taxation policy that has treated the oil sector as government’s cash cow.
The prices of petrol and diesel impact the budget of almost every Indian household through many channels. To an extent, therefore, their demand is inelastic. This fact has been used by central and state governments to embark on an extraordinary revenue raising exercise over the last three years. Just the central excise revenue from petrol and diesel has more than doubled over the last three years. Another way of looking at it is that for two levels of government, the oil sector last year yielded Rs 5.24 lakh crore, or 3.5% of GDP.
It is no one’s case that the government should not tax petroleum products. India however has a mysterious oil policy, disingenuously dubbed ‘reform’, where the domestic retail price is linked to international crude price, but the consumer hardly ever benefits from a fall in international price. This is on account of governments pocketing the gains at the expense of consumers, never mind that it’s precisely the sort of thing that gives reform a bad name. Information presented in Parliament showed that the basic cost of petroleum and diesel in Mumbai was less than half the retail price. The rest was paid by consumers on account of taxes and commissions. All our neighbours, particularly Pakistan, pass on more benefits to consumers of petrol and diesel. This places Pakistan’s economy on a relatively more competitive footing than India’s, perhaps even countervailing its ‘jihadi’ handicap.
Petroleum minister Dharmendra Pradhan’s argument that high taxes are justified on account of massive government expenditure is unconvincing. In the heyday of socialism in India, we even witnessed marginal tax rates of 97.5% for the highest slab. It was counterproductive, and successive governments moved to more reasonable taxation levels. In today’s economic context, government must lower petroleum taxes and put more money in the hands of households and enterprises. The resulting economic growth will make government revenues naturally buoyant.