Just cut it high fuel taxes are squeezing household budgets when demand is weak

Just cut it high fuel taxes are squeezing household budgets when demand is weak

The price of a barrel of the Indian basket of crude oil breached the $80 mark this week. It’s risen by about 60% since June, when mobility began to increase after the second wave. The retail pump price of petrol has gone past Rs 100/litre mark, partly on account of rising crude price. The real hit however has come from the unusually high level of taxes.

On 1 October, the pump price of petrol in Delhi was Rs 101.95, of which taxes and commissions made up Rs 60.28. Fuel taxes have been an easy option for governments to shore up revenue during the pandemic. For GoI, revenue during 2020-21 from excise collections on fuel was Rs 3.44 lakh crore, higher by 74% year-on-year. This dependence on fuel taxes makes governments reluctant to lower them even when the economy’s aggregate demand is weak. The defence of high fuel taxes is that it goes into government spending on public goods. It’s an unconvincing reason. Fiscal policy is about designing a tax and spending package to influence economic growth. There are a multitude of taxes, and their rates should be in sync with the prevailing economic context.

The context is that aggregate demand is weak because households have lost spending power. To illustrate, India has had a loose monetary policy for two years even though inflation has been relatively high. The unusual situation prevails because demand is weak and supply shocks have led to price spikes. The worst hit by an economic contraction are the relatively poorer households. In a country where over 80 of 100 passenger vehicles sold are entry level two-wheelers, high fuel taxes can only squeeze them further in an already difficult situation. In volume terms, fuel consumption is relatively inelastic. Extra revenue from fuel taxes comes partly at the cost of GST as spending elsewhere has to be reined in. High fuel taxes in the current context have adverse distributional effects. GoI should take the lead and cut its excise duty. Some states have already shown the way.