How to fuel growth

How to fuel growth

Ease record fuel prices with a tax cut, relieving consumers and boosting the economy.

Retail fuel prices rose yesterday for the tenth straight day, driven by a combination of a weakening rupee and firming up of crude oil price. Linking the retail price of petrol and diesel to crude is a reform we have supported. But what’s unjustifiable is the crippling incidence of taxes imposed on the retail price when crude price collapsed in 2015. Consequently, consumers didn’t benefit entirely from the downslide and are today paying a record retail price. By any measure, there’s no justification for the current incidence of taxes.

The price of petrol in Delhi is Rs 79.31 a litre, of which almost 46% accrues to the Centre and state government in the form of taxes. Price is higher in many other states as governments there levy a higher tax. This state of affairs can be traced largely to significant hikes in central excise duty over the last four years. The duty on petrol has increased about 105%, to Rs 19.48 a litre during the term of the Narendra Modi government. The hike has been sharper in diesel – about 331%. Many states levy a high ad valorem tax and their revenue keeps increasing along with the retail price.

In the April-June quarter, India grew at 8.2% on the back of a robust increase in consumption. The growth rate exceeded expectations. It means the government can now trigger a virtuous cycle by lowering taxes and putting more money in the hands of consumers. This will spur economic growth and simultaneously increase GST collections. Fears about a widening fiscal deficit in the event of a reduction in taxes are unconvincing. UPA-2 in its last year managed to reduce both fiscal and current account deficits despite a higher crude price and a much lower tax rate.

A quick comparison with our neighbours highlights the extent to which government in India is addicted to petroleum taxes. In Pakistan, for instance, petrol price in August averaged Rs 51.43 a litre, around 33% lower than what Delhi charged its consumers. Last year, despite an economic slowdown, the Centre effected a modest reduction in taxes. Five states followed the lead. With growth prospects looking better, the Centre must reduce fuel taxes sharply and persuade BJP administered states to do the same. The move will enrich both consumers and the exchequer.