Centre and states must cut taxes to mitigate petrol and diesel price inflation

Centre and states must cut taxes to mitigate petrol and diesel price inflation

Yesterday retail prices of petrol and diesel were increased for the ninth straight day, pushing them to record levels despite international crude price being nowhere near the level it was four years ago. In Delhi, retail petrol and diesel prices were Rs 76.87 a litre and Rs 68.08 a litre respectively. Such sharp increases choke economic growth, stoke inflation, hurt consumers and domestic budgets. The current spell is inopportune as it comes at a time when there are discernible signs of a recovery in economic growth after disruption induced by demonetisation.

To prevent these fallouts, the immediate solution is for governments at all levels to lower taxes. The Centre levies a fixed excise duty on petrol and diesel. It used the window provided by weakening of crude soon after NDA assumed power to raise duty. Excise duty on unbranded petrol was raised nine times and it is now more than twice the rate which existed when NDA came to power. In the case of unbranded diesel, the duty is more than four times what existed in mid-2014. The outcome of increase in duty has been a sharp rise in revenue collections from petro products. Revenue, which was Rs 88,600 crore in 2013-14, increased to Rs 2,53,254 crore by 2016-17.

For sure, the main cause of the current spell of increase in retail price is the hardening of international crude price. But that should not be an excuse to avoid proactive measures. The Centre must move to significantly slash excise duty. The Modi government should also persuade all states administered by BJP to lower their fuel taxes which are a percentage of an ever increasing retail price. This will make it politically difficult for non-BJP states to hold out. For almost four years, governments have used revenue from fuel taxes to offset the fallout of lacklustre economic growth. This cushion has allowed them to postpone much needed economic reforms.

In the recent past, private consumption expanded at a disappointing pace. Any measure which puts money in the hands of consumers at this moment will push up the growth rate in private consumption. This expansion will help governments garner more tax, not less. A reduction in dependence of fuel taxes will also create an incentive for the GST Council to hasten the pace of reforms, one of which must be to bring petroleum products within GST’s ambit.