Excise Duty

Explained: Why the Govt is Misleading Us on High Fuel Prices and Oil Bonds

The reason why doesn’t matter. The only thing that matters is controlling the narrative – Fabian Nicieza in Suburban Dicks.

Over the last few years, several government ministers have blamed the oil bonds issued during the era of the previous United Progressive Alliance (UPA) government, for the high petrol and diesel prices, which have prevailed for a while now.

The then oil minister Dharmendra Pradhan had tweeted in 2018 that: “The country and our OMCs [oil marketing companies} are also yet to recover from the shock of Oil Bonds worth Rs 1.4 Lakh Crores issued during the UPA regime.”

The finance minister Nirmala Sitharaman rblamed the oil bonds for the high prices of petrol and diesel, in a recent statement.  This is not true. I have explained this issue in great detail on earlier occasions. Nevertheless, I will try and offer a broader summary here, before getting on to the new points I want to make. 

Oil bonds were largely issued by the previous UPA government. This was done in order to compensate oil marketing companies, like Indian Oil, Bharat Petroleum and Hindustan Petroleum, for selling petrol, diesel, kerosene and domestic cooking gas, at a price which wasn’t monetarily feasible for them.

The argument offered by the National Democratic Alliance (NDA) government is that since interest has to be paid on these bonds and that these bonds have to be repaid, the government needs to charge a high excise duty on petrol and diesel. This leads to high petrol and diesel prices.

In that sense, the NDA government and you and me are paying for the sins of the UPA government. This argument is never made in as clear words as I am making it here. Things are left vague enough for people to fill in the gaps and make their own WhatsApp forwards.

As of March 2014, before the NDA government came to power, the total oil bonds outstanding stood at Rs 1,34,423 crore. By March 2015, this had come down to Rs 1,30,923 crore, which is where it has stayed up until March 2021.

This means that between end March 2015 and end March 2021, no oil bonds matured and hence, the NDA government didn’t need to repay a single rupee of oil bonds. Of course, interest had to be paid on these bonds. An interest of Rs 9,990 crore has to be paid on these bonds every year. This means, over a period of six years, between end March 2015 and end March 2021, the government has paid Rs 59,940 crore as interest on these bonds.

During the same period, it earned Rs 14,60,036 crore as excise duty on petroleum products. As the government told the Lok Sabha in early August this year: “Central excise duty is contributed largely by Petrol and Diesel.” So, excise duty earned on the sale of petrol and diesel makes up for a bulk of the excise duty earned on sale of petroleum products.

In total, during this period, 4.1% of the excise duty collected on petroleum products has gone towards paying interest on oil bonds. In 2020-21, this stood at just 2.7% (Rs 9,990 crore of interest against excise duty of Rs 3,71,726 crore earned on petroleum products).

In fact, if were to look at excise duty collected on just petrol and diesel, between end March 2015 and end March 2021, it amounts to around Rs 13.7 lakh crore. The interest paid on oil bonds amounts to 4.4% of this amount.

In 2021-22, the current financial year, Rs 10,000 crore worth of oil bonds are maturing and hence, need to be repaid. The interest that needs to be paid on the oil bonds during the year should amount to around Rs 9,500 crore. So, during 2020-21, around Rs 19,500 crore will be needed by the government to service these bonds.

In an answer provided to the Lok Sabha recently, the government had said that the total excise duty earned on petrol and diesel, between April and June this year, had stood at Rs 94,181 crore.

Given that, the second Covid wave was on during this period, and that it would have negatively impacted the consumption of petrol and diesel to some extent, it is safe to say that if excise duty on petrol and diesel continue to be where they are, the total collections this year can easily touch Rs 4 lakh crore. Of course, the collections on petroleum products will be even greater.

Rs 19,500 crore works to around 4.9% of Rs 4 lakh crore. So, the government is likely to spend one-twentieth of the excise duty earned on petrol and diesel, in servicing the oil bonds (both repaying maturing bonds and paying interest on the outstanding bonds).

The remaining bonds worth Rs 1,20,923 crore (Rs 1,30,923 crore minus Rs 10,000 crore worth of bonds maturing this year), will mature between November 2023 and March 2026.

The other argument that is being made is that the government needs to save money in order to repay these bonds in the years to come. It is worth clarifying here that the government meets the expenditure of a given year from the revenue earned during that year. Hence, bonds maturing in 2023, 2024, 2025 and 2026, will be repaid using taxes earned during that year. This nullifies the argument about the government having to save in order to repay these bonds.

Hence, the entire argument that the oil bonds have led to a situation where the government has had to charge a high excise duty on petrol and diesel, is totally wrong. In fact, as I have explained earlier, the reason for this lies in the fall of corporate tax collections.

In 2018-19, the total corporate tax or the income tax paid by corporates had stood at Rs 6.64 lakh crore. This fell to Rs 5.57 lakh crore in 2019-20. It fell further to Rs 4.57 lakh crore in 2020-21.

This fall was on account of the base rate of corporate tax being cut from 30% to 22% in September 2019. It can also be argued that Covid must have led to lower profits for corporates in 2020-21 and hence, lower corporate tax collections for the government.  

Data from the Centre for Monitoring Indian Economy tells us that in 2020-21, the net profit of listed corporates (more than 5,000 companies) increased by 120.3% in comparison to 2019-20. So, Covid didn’t impact profits among the listed corporates. While net profit went up by 120.3%, the corporate tax paid by these companies went up just 13.9%. 

Covid has negatively impacted smaller businesses and that must have impacted corporate tax collections to a certain extent. But a bulk of the fall in corporate tax collections seems to have come from a lower rate of tax. This has been compensated through higher excise duty on petrol and diesel.

In 2018-19, excise duty earned on petroleum products by the central government brought in Rs 2.14 lakh crore. This jumped to Rs 3.72 lakh crore in 2020-21, thanks to a higher excise duty on petrol and diesel.

The corporate tax cut was supposed to boost consumption and lead to an increase in corporate investment. But that hasn’t really happened. Expecting consumption to increase thanks to lower corporate taxes was kite-flying at its very best.

Consumption increases when people see the prospect of earning more money, not when corporate taxes go down. Investment, for a whole host of reasons, has been down in the dumps for close to a decade now,. I shall not go into these reasons in detail here, having dealt with this issue on multiple occasions in the past.

This has created a communication problem around high petrol and diesel prices for a government obsessed with managing the narrative.

In their book Nudge—The Final Edition, Richard Thaler and Cass Sunstein talk about the publicity principle, originally elucidated by the philosopher John Rawls. As Thaler and Sunstein write: “If a firm or government adopts a policy that it could not easily defend publicly, it stands to face considerable embarrassment, and perhaps much worse, if the policy and its grounds are disclosed [emphasis added].”

This is precisely the problem with the entire messaging around the issue of high petrol and diesel prices. The only reason for this is the high excise duty on petrol and diesel, in order to compensate for lower corporate tax collections.

The excise duty on petrol has gone up from Rs 9.48 per litre in October 2014 to Rs 32.90 per litre currently, a jump of close to 250%. A bulk of this increase of around Rs 10 per litre has happened in the last one year. A similar story has played out with diesel, with excise duty going up from Rs 3.56 per litre in October 2014 to Rs 31.80 per litre currently, a jump of close to 800%. (I would like to thank Chintan Patel for providing this information by using the central government notifications on excise duty on petrol and diesel).

Of course, this is not something that a narrative obsessed government can admit to. This would mean telling the world at large that the common man is being made to pay for lower corporate taxes. This has led to the entire narrative around oil bonds and they having to be repaid and interest having to be paid on them, and that leading to a higher excise duty on petrol and diesel, and hence, higher pump prices of fuel.

This is a narrative that can be easily sold on WhatsApp, given that most people don’t have the time to check the facts of any argument and buy anything that is sent to them over the world’s newest and the most happening university.

As Thomas Sowell writes in Knowledge and Decisions: 

“To exhort the individual citizen to make investments in knowledge comparable to those of lobbyists and political crusaders (both of whom have much lower costs per unit of personal benefit) is to urge him to behaviour that is irrational, if not physically impossible in a twenty-four hour day.”

This is something that the current government is making use of and projecting a narrative that wrongly blames the past government for high fuel prices.

As Thaler and Sunstein write: “Organizations of all forms should respect people, and if they adopt policies that they could not and would not defend in public, they fail to show that respect. Instead, they treat citizens as tools for their own use or manipulation [emphasis added].”

This is precisely what is happening.

The interesting thing is that the government has given the more or less the right reason behind high fuel prices in an answer to a question raised in the Lok Sabha. As it said: “The excise duty rates on petroleum products are calibrated from time to time with the objective of generating resources for infrastructure and other developmental items of expenditure, taking into account all relevant factors and keeping in view the prevailing fiscal situation.”

Every government has the right to tax the citizens in different ways. This answer tells us precisely that. Of course, explaining the rationale behind the tax is not always that straightforward.

Winter and Money Printing are Coming to India, In a Few Months

The Controller General of Accounts publishes the state of government finance at the end of every month. This data is published with a gap of one month. Hence, on 31st August, the data as of 31st July, was published.

This data, not surprisingly, doesn’t make for a good reading. The fiscal deficit, the difference between what a government earns and what it spends, for the period April to July 2020 stood at Rs 8.21 lakh crore. The fiscal deficit that the government had plans to achieve during the course of the current financial year (2020-21) stands at Rs 7.96 lakh crore. Hence, at the end of July, the actual fiscal deficit of the government was 103.1% of the budgeted one.

But given the state we are in this is hardly surprising. Nevertheless, there are several reasons to worry. Let’s take a look at it pointwise.

1) Tax collections have collapsed. Between April and July 2020, the gross tax revenue, which brings in a bulk of the money for the central government and which it shares with the state governments, is down 29.5% to Rs 3.8 lakh crore, in comparison to the same period in 2019.

Let’s look at the different taxes collected by the government between April and June this year and the last year.

They all fall down


Source: Controller General of Accounts.

 

As can be seen from the above chart, the collections of all major taxes are down big time.

Take the case of central goods and services tax. (GST) or the part of GST that ends up with the central government. During April to July 2019, the total collections of the central GST had stood at around Rs 1.41 lakh crore. During the same period this year the collections have fallen by 34% to Rs 92,949 crore. Other taxes have fallen along similar lines.

The fall in GST collections is a reflection of a massive slowdown in consumption. A slowdown in consumption ultimately reflects in a slowdown in income of individuals as well as incomes of companies. Ultimately, one man’s spending is another man’s income.

But there is something that the above chart does not show, the excise duty collections of the central government. They are up year on year by 23.8% to Rs 67,895 crore. This despite the fact that the consumption of petroleum products between April and July is down 22.5% in comparison to 2019.

So, how have excise duty collections gone up? The central government has increased the excise duty on petrol from Rs 22.98 per litre to Rs 32.98 per litre. The excise duty on diesel has been raised from Rs 18.83 per litre to Rs 31.83 per litre. Also, a substantial part of this duty is a cess, leading to a situation where the central government does not have to share the revenue earned through the cess with the state governments.

In the process, the central government has captured a bulk of the fall in oil prices.

2) As mentioned earlier, the central government needs to share a part of the money it earns with state governments. Between April and July it shared Rs 1.76 lakh crore with states, against Rs 2 lakh crore, during the same period last year. This is 12% lower, during a time when the states are at the forefront of fighting the covid-epidemic.

The ability of the state governments to raise taxes, after having become a part of the goods and services tax system, is rather limited. Take the case of petrol and diesel. The central government has raised excise duty by such a huge extent that the state governments aren’t really in a position to raise the value added tax or the sales tax on petrol and diesel, which they are allowed to charge, without having to face political repercussions for it.

3) The central government has more ways of raising money than the states. One such way is disinvestment of its stakes in public sector enterprises. This year the government plans to earn a whopping Rs 2.1 lakh crore through this route. The original plan included the plan to sell Air India. Whether that happens in an environment where the airlines business has been negatively rerated in the aftermath of covid, remains to be seen.

The other big disinvestment plan was that of the government selling its stake in the Life Insurance Corporation of India through an initial public offering. There are one too many regulatory hurdles that need to be removed, before a stake in India’s largest insurance company can be sold to investors. Long story short, it looks highly unlikely that the government will get anywhere near earning Rs 2.1 lakh crore this year, through the disinvestment front.

Having said that, the government can always resort to some accounting shenanigans, like getting one public sector enterprise to buy another, and pocketing that money. This is likely to happen in the second half of the year.

Over and above this, the government earns a lot of money from the dividends that it earns from public sector enterprises as well as banks and financial institutions. The target for this year is around Rs 1.55 lakh crore. Public sector banks will continue to remain on a weak wicket through this year, hence, their ability to pay dividends is rather limited.

The only way the government can make good this target is by raiding the balance sheet of the RBI for money. Also, the government is likely to raid the cash balances of public sector enterprises which have them, by asking them to pay special dividends.

4) The money that gets invested into various small savings schemes, which includes schemes like Post Office Savings Account, National Savings Time Deposits ( 1,2,3 & 5 years), National Savings Recurring Deposits, National Savings Monthly Income Scheme Account, Senior Citizens Savings Scheme, National Savings Certificate ( VIII-Issue), Public Provident Fund, KisanVikas Patra and Sukanya Samriddhi Account, net of the redemptions, is a revenue entry into the government budget.

This time it has been assumed that the government will get Rs 2.4 lakh crore through this route. Between April and July, Rs 38,413 crore or just 16% of the targeted money has come in. Last year, during the same period, 38% of a much lower target of Rs 1.3 lakh crore had been achieved. Clearly, this target is also going to be missed.

5)  Of course, the government understands this and which is why in early May it increased its borrowing target from Rs 7.8 lakh crore to Rs 12 lakh crore, by more than 50%. The government borrows money to finance its fiscal deficit.

What this means is that the government wants to at least keep the fiscal deficit to around Rs 12 lakh crore. The question is will that happen? Gross tax revenues are already down 30%. Of course, as the economy keeps opening up, this number will look better. Having said that, even if tax revenues are down by 15% as of the end of the year, we are looking at a shortfall of Rs 2.5 lakh crore for the central government. The other big entries of disinvestment and the net-revenue from small savings schemes, are also looking extremely optimistic in the current situation.

Even if the government achieves a fiscal deficit of Rs 12 lakh crore and the economy shrinks by around 10% this year, we will be looking at a central government fiscal deficit of 7% against the targeted 3.5%.

In this scenario, it is now more than likely that the RBI will resort to direct financing of government expenditure by printing money and buying government bonds. The government sells bond to finance its fiscal deficit.

This isn’t to say that the RBI hasn’t printed money this year. It has. But it has chosen to operate through the primary dealers. But the mask might come off in in the time to come and the RBI might decide to buy bonds directly from the government.

Winter and money printing are coming to India, in a few months.

 

Indians, Be Prepared! Petrol-Diesel Prices Are Likely to Stay High

light-diesel-oil-250x250

The price of petrol in India is at a four-year high. The price of diesel is at an all time.  And from the looks of it, petrol/diesel prices are unlikely to go down any time soon.

Narendra Modi took over as the prime minister of India in May 2014. The average price of the Indian basket of crude oil during the course of the month was $106.85 per barrel. Petrol was sold at Rs 80 per litre in Mumbai and Rs 71.41 per litre in Delhi. Diesel was being sold at Rs 65.21 per litre and Rs 56.71 per litre respectively, in the two cities.

Cut to March 2018. The average price of the Indian basket of crude oil is much lower at $63.80 per barrel. Petrol, as on April 3, 2018, is being sold at Rs 81.84 per litre in Mumbai and Rs 73.99 per litre in Delhi. Diesel is being sold at Rs 69.06 per litre and Rs 64.86 per litre, respectively, in the two cities.

The average price of crude oil in March 2018 was 40.3% lower than it was in May 2014. But the price of petrol and diesel, which are products made out of oil, is higher now than it was in May 2014.

What explains this? One reason lies in the fact that the rupee has depreciated against the dollar. One dollar was worth around Rs 58-59 in May 2014. In March 2018, it is worth Rs 64-65.

This basically means that Indian importers of oil have to pay more in terms of rupees for the dollars that they need, to buy oil. Hence, to that extent petrol and diesel will be costlier. But this still does not explain.

At Rs 59 to a dollar, one barrel of the Indian basket of crude oil would have cost around Rs 6,304 in May 2014. At Rs 65 to a dollar, one barrel of oil would have cost around Rs 4,147 per barrel in March 2018. Even after adjusting for the depreciation of the rupee against the dollar, oil was around 34.2% cheaper in March 2018 in comparison to May 2014.

So, what explains the fact that petrol and diesel are now costlier than they were when Modi first came to power?

The retail price of petrol and diesel, constitutes taxes collected by the central government, the respective state government where they are being sold, as well as the dealer commission.

Let’s consider the situation in Delhi in May 2014. The retail selling price of one litre of petrol as mentioned above was Rs 71.41 per litre. The price before dealer commission and taxes was Rs 47.12. This meant that Rs 24.29 per litre was collected as dealer commission and taxes. Of this, Rs 2 made for the dealer commission. Rs 10.39 was the tax collected by the central government. Rs 11.9 was the tax collected by the state government. The dealer commission and taxes constituted 34% of the retail selling price of petrol.

Now let’s cut to March 2018. The retail selling price of petrol as on March 19, 2018, in Delhi, was Rs 72.19 per litre (this is the latest data available). The price before dealer commission and taxes worked out to Rs 33.78 per litre. This basically means that Rs 38.41 per litre was collected as dealer commission and taxes. Of this Rs 3.58 was the dealer commission. Rs 19.48 was the tax collected by the central government and Rs 15.35 was the tax collected by the state government. The dealer commission and taxes constituted for around 53% of the retail selling price of petrol.

Basically, between May 2014 and now, the dealer commission and taxes in total have gone up by 58.1% (in Delhi). A similar dynamic has played out in other parts of the country as well. The same logic holds for diesel as well. In fact, dealer commission and taxes made up for 21.5% of the diesel price in Delhi, in May 2014. As on March 19, 2018, it made up for 43.2% of the retail selling price.

What has happened here? The central government and the state government, since 2014, have captured a bulk of the fall in the price of oil, by increasing taxes on petrol and diesel. While the average price of the Indian basket of crude oil was $106.85 per barrel in May 2014, it had fallen to as low as $28.08 per barrel in January 2016. A commiserate fall in petrol and diesel prices did not happen.

One of the major policy decisions of the Modi government when it first came to power was to increase the excise duty on petrol and diesel. Along similar lines, the state governments also quietly raised taxes on petrol and diesel.

In an ideal world, when the consumer did not receive the full benefit of falling oil prices, he should at least be protected a little from high prices of petrol and diesel. But that is unlikely to happen, given that the central government is not making as much money through the Goods and Services Tax (GST), as it expected to.

How is the GST linked to this?

For 2018-2019, the government expects to collect Rs 6,03,900 crore as central GST. This amounts to Rs 50,325 crore per month, on an average. In the month of March 2018, when the collections for February 2018 were made, the central GST collected amounted to Rs 27,085 crore (Rs 14,945 crore  was collected as central GST + Rs 12,140 crore was the central government’s share in the integrated GST). This is way lower than what the government has projected in the annual budget.

Unless, central GST numbers improve, the total revenue collected by the government will be under pressure in 2018-2019.

In this scenario, when the government is already under pressure on the revenue front, it is highly unlikely to decrease taxes on petrol and diesel, and help the end consumer. If it does so, there will other costs that will have to be paid for, right from a rising fiscal deficit to a higher interest rate.

As far as the international price of oil is concerned, there are way too many factors influencing it at any point of time, to make a reasonable prediction about it. Having said that, one factor that needs to be kept in mind is the up-coming initial public offering (IPO) of Saudi Aramco, the biggest oil company in the world.

The IPO is being billed as the biggest IPO in the world and is likely to unveiled by the end of June 2018, newsreports suggests.

In this scenario, it is highly unlikely that Saudi Arabia will allow the price of oil to fall from these levels, until the IPO is pushed through. The Indian basket of crude oil has seen a largely upward trend since June 2017.

Long story short, Indians need to be prepared for a period of high petrol and diesel prices.

The column originally appeared in the Quint on April 3, 2018.

The Rs 90,000 crore Consumer Spending Kicker That the Govt Missed Out On

 

light-diesel-oil-250x250The Narendra Modi government has increased the excise duty on petrol and diesel nine times since November 2014.

This has ensured that the benefit of falling oil prices has not been totally passed on to end consumers in the form of lower petrol and diesel prices. What has not helped is that the state governments have also increased their share of taxes on petrol and diesel and ensured that the benefits of lower oil prices have not been totally passed on to the citizens of this country.

A press release put out by the Bhartiya Janata Party in February 2016 said that all state governments except Mizoram, Assam, Tamil Nadu, Chhattisgarh and Gujarat, had increased the value added tax on petrol and diesel.

Hence, the increase in excise duty on petrol and diesel, is not the only reason for an increase in the price of petrol and diesel.

Having said that, what would have happened if the benefit of lower oil prices had been totally passed on to the end consumers in the form of lower petrol and diesel prices? Dr Soumya Kanti Ghosh, the chief economic adviser of State Bank of India, has done an in-teresting calculation on this.

As he writes in a recent research note titled If Wishes Were Horses: “Even though international oil prices are at a decade low, yet Government has increased excise duty both in petrol and diesel. So, we made an attempt to calculate total savings of the consumers if Government would not have hiked the excise duty on petrol and diesel products.”

So what does Ghosh’s calculation tell us? As he writes: “By removing only additional central excise duty from petrol and diesel retail selling prices, the hypothetical petrol price per litre would be Rs 47.63 (Actual: Rs 59.63), and diesel would be Rs 38.96 a litre (Actual: Rs 44.96)…If we assume that the consumption of petrol and diesel in FY16 of 95.28 MMT (Apr-Jan: 79.4 MMT), this would have translated into Rs 90,000 crore of savings for the consumers, which could have provided additional demand in the economy to the extent of 1% of GDP….In effect, this means that if wishes were horses, the decline in oil prices in itself may have provided the much needed impetus to demand and we may not have to wait for the pay hikes!” (MMT = million metric tonnes).

This means that if the central government wouldn’t have increased the excise duty on petrol and diesel, consumers would have benefitted to the tune of Rs 90,000 crore. This money would have been spent and pushed up consumer demand to the extent of 1% of GDP. And that would have been a huge thing. As is well known the multiplier effect of consumer spending is significantly better than that of government spending, where leakages are huge.

Of course, if the government did do things along these lines, it would have meant that the fiscal deficit of the government would have gone up. The fiscal deficit is the difference between what a government earns and what it spends. If the government gave up taxes to the tune of Rs 90,000 crore (actually lesser than this, but I will come to it), it’s earnings would have fallen, leading to an increase in its fiscal deficit.

Actually, the increase in fiscal deficit would be lower than Rs 90,000 crore. This is because the increase in consumer demand due to excise duty on petrol and diesel not being raised, would also bring in some money to the government in the form of both direct and indirect taxes.

Further, there were other ways through which the government could look at bringing down its fiscal deficit. For starters, it owns 11.19% stake in the cigarette maker ITC. This stake as on March 21, 2016, was worth a little over Rs 29,600 crore. Why does the government, which runs anti-tobacco advertisements, continue to own a cigarette maker? (I know I keep repeating this point like a broken record).

This stake could have been sold and a significant portion of the increase in fiscal deficit could have been covered. Those who like to support the government on all issues like to point out that ownership of shares of ITC brings in a dividend for the government. Hence, why let go of this regular income?

The question to ask here is what is the dividend yield of ITC? The dividend of ITC is 1.7%. Dividend yield is the total dividend the company has paid out during the year divided by its current market price. The dividend yield of ITC is less than half of the return of 4% available on a savings bank account. Given this, the dividend argument clearly does not work.

Also, the government continues to run many loss making companies. The Economic Survey for 2015-2016 released before the budget points out that public sector enterprises have accumulated losses of Rs 1.04 lakh crore. The government keeps bearing these losses. And the funny thing is that some of these losses are not even a part of the budget.

As economist Jaimini Bhagwati recently wrote in the Business Standard: “Funds will be provided to support continued losses in public sector undertakings including Indian Railways, some of which are not part of the Budget.”

If these loss making companies are shut down and their assets (primarily land) gradually monetised, it will tremendously benefit the government. The government has made some noises along these lines.

As the finance minister Arun Jaitley said in his budget speech: “A new policy for management of Government investment in Public Sector Enterprises, including disinvestment and strategic sale, has been approved. We have to leverage the assets of central public sector enterprises(CPSEs) for generation of resources for investment in new projects. We will encourage CPSEs to divest individual assets like land, manufacturing units, etc. to release their asset value for making investment in new projects.” Let’s hope this doesn’t just end up as a paragraph in a finance minister’s speech.

The disinvestment target at the beginning of the year was set at Rs 69,500 crore. Only Rs 25,312.60 crore was achieved. Hence, if the government had made an effort to earn money through these routes, it wouldn’t have had to increase the excise duty on petrol and diesel, nine times since November 2014.

Also, it needs to be pointed out here is that not all the savings on account of lower petrol and diesel prices, on account of government not raising the excise duty, would have translated into consumer spending.

Some of it is bound to have found its way into bank accounts and other financial savings instruments. Even that is a good thing given that household financial savings have been falling over the years. In 2007-2008, the household financial savings had stood at 11.2% of the gross domestic product (GDP). By 2011-2012, they had fallen to 7.4% of GDP. Since then they have risen marginally. In 2014-2015, the household financial savings stood at 7.7% of GDP.

A higher household financial savings ratio would have worked towards lower interest rates over the long term. Further, the government may not have been able to fund the entire shortfall of Rs 90,000 crore through these ways. Nevertheless, a good portion could have been filled in through the methods highlighted above.

This means that the government would not have had to increase the excise duty nine times. Possibly, four or five times would have been enough. Nevertheless, making money by simply raising excise duty on petrol and diesel was the easy way out, and who doesn’t like to take the easy way out.

The column appeared in Vivek Kaul’s Diary on March 22, 2016

When Oil Price Falls, Excise Duty Goes Up. When It Rises, Petrol/Diesel Prices Go Up.

light-diesel-oil-250x250Petrol and diesel prices have gone up. This time the prices were increased by the oil marketing companies(OMCs).

The Indian Oil Corporation (IOC), one of the OMCs, said in a press release that it has decided to “increase in Retail Selling Price of Petrol by Rs. 3.07/litre at Delhi (including State levies) with corresponding price revision in other States.”

At the same time, it has decided to increase the “Retail Selling Price of Diesel by Rs. 1.90/litre at Delhi (including State levies) with corresponding price revision in other States.” The increase came in effect from the midnight of March 16-March 17, 2016.

The price of oil has been going up over the last few weeks. As on February 11, 2016 the price of the Indian barrel of crude oil was at $26.95 per barrel. Between then and March 16, the price of the Indian basket of crude oil has gone up by 34% to $36.10 per barrel.

In rupee terms also the increase in prices has been more or less similar. The price of one barrel of crude oil has one up by around 32.7% to Rs 2431.94.

This increase in price has forced the oil marketing companies to increase the price of petrol and diesel. As the IOC said in its press release: “The current level of international product prices of Petrol & Diesel and INR-USD exchange rate warrant increase in price of Petrol and Diesel, the impact of which is being passed on to the consumers with this price revision.”

In any other market this would have been a fair deal. If the price of the input goes up (i.e. oil in this case), the price of the output (i.e. petrol and diesel in this case) goes up as well. But the Indian oil products market is anything but fair.

When the price of oil was falling, the central government and the state governments captured the major portion of the fall, by increasing taxes which are built into the price of petrol and diesel. Since November 2015, the central government has increased the excise duty on petrol and diesel, five times.

This basically means that when the oil price falls, the governments capture the major part of the benefit. But when they go up, the consumer has to pay for it. How is this fair in any way? Also, what happens if oil prices continue to go up, will the entire increase in price be continued to be passed on to the consumers? If the government did not pass on the total fall in oil prices to the consumer, it is only fair that it doesn’t pass on the entire increase as well.

The point being that the consumer has to pay both ways, when the prices come down and when they are going up.

One logic offered by those who like to defend the government on anything and everything, is that the money coming in through the increase in excise duty on petrol and diesel, is being used for farmers. This conclusion possibly comes from the tone of the finance minister Arun Jaitley’s budget speech. But is this true?

Economist Ashok Gulati exposes this sleight of hand by the government in a column in The Indian Express. As he points: “The allocation for the Department of Agriculture, Cooperation and Farmers’ Welfare (DoA), is raised from the revised estimate (RE) of Rs 15,809 crore in FY16 to a budgeted estimate (BE) of Rs 35,983 crore for FY17, a whopping increase of 127 per cent! This would make anyone jump and conclude what a wonderful stroke the finance minister has played for farmers. But hold on. There’s a catch. Much of the increase (Rs 15,000 crore) is due to interest subsidy on short-term credit. Earlier, this subsidy was Rs 13,000 crore and was shown under the Department of Financial Services. Now, it’s transferred to the DoA.”

So where is the money raised through the increase in excise duties and the money saved because of a fall in oil prices essentially going? Jayant Sinha, the minister of state in the finance ministry, recently explained this in a written reply to a question in Lok Sabha.

Details of Subsidies (Rs. in crore)

Subsidy2012-132013-142014-152015-16 RE
Food8500092000117671139419
Fertilizer65613673397107672438
Petroleum96880853786026930000
Other95869915924215944
Total257079254632258258257801
RE=Revised Estimates

Source: http://pib.nic.in/newsite/PrintRelease.aspx?relid=137493

Take a look at the above table. The petroleum subsidy has fallen from Rs 96,880 crore in 2012-2013 to Rs 30,000 crore in 2015-2016. The OMCs currently suffer under-recoveries every time they sell kerosene and domestic cooking gas. In March 2016, the under-recovery on kerosene stood at Rs 6.58 per litre. The government compensates the OMCs for these under-recoveries and this shows up under the petroleum subsidy head.

Despite the fall in petroleum subsidies, the total subsidy bill of the government has barely changed. It has slightly increased from Rs 2,57,079 crore in 2012-2013 to Rs 2,57,801 crore in 2015-2016.

What the table shows clearly is that the fall in petroleum subsidies has been more or less been made up for by an increase in food subsidies. The food subsidy bill of the government has jumped from Rs 85,000 crore to Rs 1,39,419 crore.

As I have discussed in previous columns, the food subsidy regime in India is very leaky. A major portion of the rice, wheat and sugar which are distributed through it, are siphoned off, by the owners of the fair price shops through which the distribution takes place. The government is trying to plug this leak by ensuring that in the days to come, the subsidy is paid directly into the bank account of the targeted beneficiaries.

As Sinha said: “In cash transfer, the benefit is transferred in the beneficiary’s account, preferably Aadhaar seeded. Presently, LPG subsidy is transferred directly in to the bank accounts of beneficiaries. Food subsidy in cash is disbursed in wo Union Territories viz, Puducherry and Chandigarh, directly in beneficiaries’ bank accounts, in kind, after biometric authentication, in 70000 fair price shops at present.”

The government also has plans to pay out fertilizer subsidy directly during the next financial year in a few districts across the country on a pilot basis. This is a good move and I sincerely hope that the government meets more and more success on this front. The subsidies will reach the intended beneficiaries and will benefit the Indian economy in the process.

The column originally appeared on Vivek Kaul’s Diary on March 18, 2016