Excise Duty

Oil is Now Half the Price of Bottled Water in India, but Only for Govt

 

bisleri
In my Diary dated January 15, 2016, I had said that I expect the government to increase the excise duty on petrol and diesel soon. On that very evening, the central bureau of excise and customs, which comes under the ministry of finance led by Arun Jaitley, increased the excise duty on both petrol as well as diesel. This after the price of the Indian basket of crude oil had fallen to $26.43 per barrel on January 14, 2016.

This is the eight increase in excise duty on customs and excise since November 2014. The first increase had happened on November 12, 2014. With the latest increase the excise duty on petrol stands at Rs 8.48 per litre. Between November 2014 and now, the excise duty on unbranded petrol has gone up by Rs 7.28 per litre or a whopping 607%.

With the latest increase the excise duty on unbranded diesel stands at Rs 9.83 per litre. Between November 2014 and now, the excise duty on unbranded diesel has gone up by Rs 8.37 per litre or a whopping 573%.

The government has clearly captured in a large chunk of the gain because of lower oil prices. As on January 16, 2016, the price of petrol in Mumbai stood at Rs 66.09 per litre. In November 2014, when the excise duty was raised for the first time, the price of petrol in Mumbai had stood at Rs 71.91 per litre. Hence, for the end consumer, the price of petrol in the city has fallen by 8.1%.

As on January 16, 2016, the price of diesel in Mumbai stood at Rs 51.25 per litre. In November 2014, the price of diesel in Mumbai was at Rs 61.04 per litre. Hence, for the end consumer, the price of diesel in the city has fallen by 16%.

How much has oil fallen by during the same period? As on November 11, 2014 (a day before the excise duty on petrol and diesel was raised by the Narendra Modi government for the first time), the price of the Indian basket of crude oil was at $79.11 per barrel. By January 14, the price had fallen to $26.43 per barrel or close to 67%.

In rupee terms the price of oil has fallen by close to 64%. But the price of petrol and diesel has fallen by only 8.1% and 16%. In fact, if we look at the price of oil in rupee terms, we can come to a very interesting conclusion.

As on January 14, 2016, the price of the Indian basket of crude oil was at Rs 1,773.19 per barrel. One oil barrel is basically 159 litres. This means that one litre of the Indian basket of crude oil costs around Rs 11.2 per litre. One litre of bottled water (or what we call Bisleri at the generic level) typically costs Rs 20 per litre. Given this, bottled water in India is now nearly twice as expensive as oil. Or to put it in another way, oil is now half the price of that of bottled water, but only for the government. You and me have missed out on this party.

Of course, these gains haven’t been passed on to the end consumer and have been captured by the government. Interestingly, petrol prices since February 2015, have actually gone up. The price of petrol in Mumbai as on February 4, 2015, was at Rs 63.9 per litre, whereas currently it is at Rs 66.09 per litre. The price of the Indian basket of crude oil was at $54.97 per barrel on February 4, 2015. It has since then fallen by more than 50% to $26.43 per barrel.

One of the points that typically gets made in favour of the government increasing excise duty on petrol and diesel is that these fuels pollute and need to be taxed in order to protect the environment.

Data from Centre for Monitoring Indian Economy(CMIE) points out that between January and December 2014 a total of 18,385 thousand tonnes of petrol was consumed in the country. Between January and December 2015, a total of 21,089 thousand tonnes of petrol was consumed within the country. This was around 14.7% more.

A major portion of this would have come from an increase in new vehicles which run on petrol. If one takes this into account, then the consumption of petrol during the last one year, has not gone up significantly, and this despite lower prices.

How do things stand with diesel? Between January and December 2014, the total amount of diesel consumed in the country stood at 69,022 thousand tonnes. Between January and December 2015, the total amount of diesel consumed in the country stood at 72,652 thousand tonnes or 5.3% more than the previous year.

Again, if we adjust for newer diesel vehicles and other ways in which diesel is used, the total amount of diesel consumed in the country didn’t go up significantly, despite lower prices. What this tells us is that the increase in consumption of petrol and diesel has happened because of new vehicles and not because of lower prices.

So does this mean that the government will now clamp down on the production of new vehicles or increase taxes on them to make them more expensive for people to buy them and in the process control pollution?

Also, if the government was serious about pollution, why has the price differential between petrol and diesel gone up in the last 15 months? In November 2014, the difference between the price of petrol and diesel was at Rs 10.87 per litre. Now the difference stands at Rs 14.84 per litre. This raises the question that why is the government incentivising diesel, which pollutes more?

Further, the bigger question that no one in government seems to be ready to answer is what happens when oil prices start to go up again? Given that the government hasn’t passed on the bulk of the fall in price of oil to the end consumer, it is only fair that it does not pass on an increase in prices as well, as and when it happens.

In that scenario where will the government get the money for to continue to finance its expenditure? This is something that Arun Jaitley, who I call the excise duty hike minister these days, needs to answer. Or will the government increase the price of petrol and diesel, something the Bhartiya Janata Party (BJP) had majorly protested against when it was in the opposition.
Postscript: In order to understand why the government is increasing the excise duty on petrol and diesel, read this: Happy new year folks: The govt has increased excise duty on petrol and diesel again!

The column originally appeared on the Vivek Kaul Diary on January 19, 2016

Why oil prices have fallen by 63% and petrol prices by only 17%

light-diesel-oil-250x250One good news for the Indian economy during this financial year has been the huge increase in indirect tax collections. Customs duty, excise duty and service tax together form the indirect taxes collected by the central government.

Data released by the ministry of finance earlier this month showed that indirect taxes as a whole have grown by close to 36%, during the course of this financial year (April to October 2015). The accompanying table provides a breakup of the different kinds of indirect taxes collected during the course of this financial year.

Indirect Tax Collection:  April- October 2015

(Rs. in crores)

Tax Head

 

 

B.E.

2015-16

For OctoberUp-to October% of BE achievement
2014-152015-16% Growth2014-152015-16% Growth
 Customs208336

 

168001899813.110483112244816.858.8
Central Excise*228157

 

135692255066.28758814768568.664.7
Service Tax209774

 

125281714336.88937911272726.153.7
 

Total

 

646267

 

 

42897

 

58691

 

36.8

 

281798

 

382860

 

35.9

 

59.2

*Exclusive of cess administered by other departments.

What is interesting is that customs duty, central excise duty as well as service tax collected have grown at very good rates. The increase in the collection of indirect taxes between the end of 2013-2014 and the end of 2014-2015 had been just 9.1%. Also, the government failed to meet the indirect tax target of Rs 6,24,902 crore in 2014-2015. It managed to collect only Rs 5,42,325 crore.

Also, the indirect taxes collected during the course of this year up until now indicate that the government seems all set to meet its target of Rs 6,48,418 crore. This target is an increase of 19.6% in comparison to the indirect taxes collected during the last financial year.

Given that the indirect taxes collected have grown by 35.9% this year, meeting the indirect taxes target for this year, should not be a problem at all. As finance minister Arun Jaitley said earlier this month: “One of the greatest positives I can see is a huge increase in indirect tax revenues.”

The question is how genuine and sustainable is this massive growth in indirect taxes. As the ministry of finance press release put out earlier this month points out: “These collections reflect in part increase due to additional measures taken by the Government from time to time, including the excise increases on diesel and petrol, the increase in clean energy cess, the withdrawal of exemptions for motor vehicles, capital goods and consumer durables, and from June 2015, the increase in Service Tax rates from 12.36% to 14%. However, stripped of all these additional measures, indirect tax collections increased by 11.6% during April-October 2015 as compared to April-October 2014.”

Once we take these factors into account the rise in indirect tax collections is a much muted 11.6%. To be honest, the finance minister Jaitley acknowledged this recently.

The 68.6% jump in central excise duty is the main reason behind the massive jump in indirect tax collections. In fact, the jump in excise duty makes up for close to 60% of the overall jump in the indirect taxes collected this year.

This jump has primarily come due to the government increasing the excise duty on petrol and diesel five times between last year and now. In fact, the latest increase in excise duty on petrol and diesel came about earlier this month.

With these increases in excise duty on petrol and diesel, the government has more or less fully captured the fall in oil prices for itself, and not passed it on to you and me. A litre of petrol currently costs Rs 68.13 per litre in Mumbai. It was at Rs 80 per litre around the time, Narendra Modi was elected to power in May last year.

Between then and now, the petrol price has fallen by just 17.4%. In comparison, the price of the Indian basket of crude oil has crashed by 63%. On May 26, 2014, when Narendra Modi was sworn-in as the prime minister of India, the price of the Indian basket of crude oil was $108.05 per barrel. On November 16, 2015, the price was at $39.89 per barrel.

This clearly shows that the government has captured almost all the benefit of falling oil prices. A 63% fall in the price of oil has led to just a 17% fall in the price of petrol in Mumbai.

There are multiple problems with this approach.

The government talks about having dismantled the administered price mechanism on the pricing of petrol and diesel. But that is clearly not the case. A fall in oil prices does not immediately lead to a fall in petrol and diesel prices. The government has captured the fall by increasing the excise duty on petrol and diesel.

Further, the government has become heavily dependent on the revenue coming in from an increase in excise duty on petrol and diesel. What will it do if and when the oil price starts to go up? Will it cut the excise duty in order to ensure that price of petrol and diesel does not rise? Given that it did not pass on the benefits of a fall in the price of oil to the end consumer, isn’t it only fair that it shouldn’t be passing on the increase as well?

Also, it is worth remembering here that trying to forecast the price of oil remains tricky business.  As Philip Tetlock and Dan Gardner write in Superforecasting—The Art and Science of Prediction: Take the price of oil, long a graveyard topic for forecasting reputations. The number of factors that can drive the price up or down is huge—from frackers in the United States to jihadists in Libya to battery designers in Silicon Valley—and the number of factors that can influence those factors is even bigger.”

Further, if it cuts the excise duty, as and when the oil price goes up, it will have to borrow more and that will create its own set of problems. The fiddling around with excise duty on petrol and diesel, shows a lack of a stable policy on the tax front. The finance minister Arun Jaitley has often outside India talked about a stable tax regime for foreign investing in India. Why forget us Indians, who live in India?

Another impact of this massive increase in indirect tax collections has been the junking of the disinvestment programme, though no politician will admit to the same. At the beginning of the year, the government had set a disinvestment target of Rs 69,500 crore. But that is not going to be achieved. Meanwhile, the government will continue to waste the taxpayer’s hard earned money on dud companies like MTNL and Air India. Minimum government and maximum governance will continue to remain a slogan.

On the good side, the fiscal deficit number will look better than 3.9% of GDP it was projected at, in the budget document.

The column originally appeared on The Daily Reckoning on November 18, 2015

 

Yesterday, once more: Will LIC come to govt’s rescue again?

LIC

On January 13, 2015, the ministry of finance declared the indirect tax collection numbers for the period April to December 2014. And they aren’t looking very impressive.
The government managed to collect Rs 3,77,648 crore during the period, in comparison to Rs 3,54,049 crore it had managed to collect during the same period last year. This is a jump of 6.7%. Indirect taxes include excise duty, customs duty and service tax.
The trouble is that the indirect tax collection target for this financial year is Rs 6,24,902 crore. The total amount collected in the last financial year stood at Rs 5,19,520 crore. Hence, it was assumed that the indirect tax collection would grow by 20.3% from what was achieved last year.
What this tells us clearly is that the growth of the indirect tax collections is nowhere near what it was assumed to be. In the first nine months of the year, the government has managed to collect only 60.6% of the year’s target, meaning that 39.4% of the target still remains to be collected in the last three months of the financial year. Also, unlike direct tax, the collection of indirect taxes is not totally skewed towards the end of the year.
In a report titled Will the Government Meet the Fiscal Deficit Target for F2015? analysts Chetan Ahya and Upasana Chachra of Morgan Stanley point out that “tax collection picks up seasonally toward the end of the fiscal year, with direct tax collection between December and March at 51.4% of total (five-year average) and indirect tax collection at 42% of total.”
So, between December and March, in the last five financial years, the government managed to collect 42% of the indirect tax target set for the year. This time around it needs to collect 39.6% of the annual target between January and March, which will be a tough ask indeed.
It needs to be pointed out here that during the last five years, the economic growth for a significant part of the period was greater than 8%. Currently, the economic growth is around 5%. Hence, indirect tax collections will slowdown to that extent.
Take the case of excise duty. In the first nine months of the financial year the government managed to collect Rs 1,19,719 crore of excise duty, a jump of just 1.6% in comparison to the last financial year. When the budget was presented the government had assumed that excise duty collection will jump by 15.4% during the course of the year.
The government has increased the excise duty on petrol and diesel thrice since October 2014. The third increase came on January 1, 2015, and hence, the excise duty collected because of this increase are not a part of the just released indirect tax data.
The higher excise duty on petrol and diesel is expected to boost the indirect tax collections between January and March 2015 by Rs 14,600 crore, write Ahya and Chachra.
At the same time the “removal of excise SOPs for autos and consumer goods sectors from December 31 [is]expected to add ~Rs 2,400 crore between January and March,” feel the Morgan Stanley analysts.
But even this will not help the government meet its excise duty target of Rs 2,07,110 crore. Taking into account average collections over the last five years and this year’s indirect tax collections it is highly unlikely that the government will be able to meet its indirect tax target for this year. My guess is that it will fall short of the target by around 8-10%.
This gap will amount to Rs 50,000-60,000 crore (~ 8-10% of indirect tax target of Rs 6,24,902 crore). How will the government fill this gap? One way as I have often pointed out in the past will be to cut expenditure. A recent newsreport in the Business Standard points out that “on an average, key ministries, including those of agriculture, rural & urban development, and infrastructure, might see cuts of up to 20 per cent in Plan allocation compared to the FY15 Budget estimates.” This can’t be good news in an environment where corporate investment is slow due to excessive debt levels.
The government will also force public sector units to shell out higher dividends as it had done last year as well. The dividends from public sector units were supposed to contribute Rs 29,870.12 crore to last financial year’s budget. Ultimately the government ended up collecting Rs 43,074.58 crore. This year’s target is Rs 27,815.10 crore. The actual number this year will also be considerably higher.
What adds to the troubles of the government is the fact that it looks highly unlikely to meet the disinvestment target as well. Disinvestment of shares in public sector units was expected to bring in Rs 43,425 crore. Until now only Rs 1,700 crore has come in through this route. Now news coming in suggests that bankers are having a tough time lining up investors for the shares of companies that the government wants to disinvest.
The Economic Times reports that: “Bankers are finding it tough to convince foreign investors to commit money in the proposed share sale as the government is yet to implement reforms that it had promised while marketing the issues previously.”
Whenever such a situation has arisen in the past, where the market is not ready to buy shares of public sector companies, the government has forced the Life Insurance Corporation (LIC) of India to come to its rescue by buying these shares.
The money invested by LIC is essentially the hard earned savings of millions of people and it is not fair to use it to help bail out the government all the time. From the looks of it something similar seems to set to happen this year as well, which is clearly not good news.
What does not help the government is the fact that it has very little time left to carry out the disinvestment. For reasons, which only the government can best explain, there has been barely any activity on the disinvestment front over the last six months and only now things are looking to pick up. But it may be a case of too little too late.

The column originally appeared on www.equitymaster.com as a part of The Daily Reckoning on Jan 15, 2015

Of BJP and Congress: Why governments hate markets

light-diesel-oil-250x250Vivek Kaul

Over the years I have come to the conclusion that governments don’t like markets. Markets are too unpredictable for their taste. And they don’t do what the government wants them to do. They don’t move in directions the government wants them to. In short, markets can’t be controlled. Or to put it even more simply, markets have a mind of their own.
And no government likes that.
Hence, when the diesel price was decontrolled in October earlier this year, I had my doubts about how long will it last. The finance minister Arun Jaitley had said on that occasion “Henceforth, like petrol, the price of diesel would be linked to the market and therefore depending on whatever is the cost involved …the consumers will have to pay.”
At times things sound too good to be true. This was one of those statements. And now only a few weeks later, the government has sideline the market and decided to go about setting the price of petrol and diesel.
Earlier this week on December 2, 2014, the government decided to raise the excise duty on petrol and diesel. This was the second time the government increased the duty in less than a month. The excise duty on petrol was increased by Rs 2.25 per litre and that on diesel by one rupee per litre.
This increase in duty will not be felt at the consumer level. Nonetheless, if the government had not decided to increase the duty it would have meant that consumers would have benefited from a further fall in the price of petrol and diesel. Hence, the government is essentially creaming off the consumer surplus.
This also explains why the price of petrol and diesel in India hasn’t fallen as much as the global oil prices have. And that means the petrol and diesel prices are no longer linked to the market, as Jaitley would have had us believe only a few weeks back. As an editorial in the Business Standard points out: “If the government is forcing the oil marketing companies to set prices according to the dictates of political masters, then it can hardly claim deregulation has happened.”
The government is having a tough time meeting its expenditure and this is a very easy way to raise its income. The fiscal deficit for the first seven months of this financial year (April to October 2014) was at 89.6% of the annual target. Last year during the same period, the number was at 84.4%. Fiscal deficit is the difference between what a government earns and what it spends.
Hence, if the government has to meet its fiscal deficit target it has to increase its income or decrease its expenditure or possibly do both.
An editorial in The Indian Express points out that the two hikes in excise duty, will help the government earn an additional Rs 10,000 crore. This should come as a welcome relief for the government given that estimates now suggest that indirect tax collections will see a shortfall of around Rs 90,000 crore in comparison to what had been assumed at the time the budget was presented in July this year.
The editorial goes on to suggest that instead of increasing the excise duty the government could have levied a cess and collected that money to go towards a specific purpose like a national highway fund. But that hasn’t happened and the increase in the excise duty will just disappear into the consolidated fund of India.
But that’s just one part of the story. Every government has the right to increase or decrease taxes, after taking into account the situation that it is operating in. Nevertheless, if the government had allowed the market to operate, the oil marketing companies would have been allowed to pass on this increase in excise duty to the end consumer. The fact that they haven’t been allowed to do so means that the government is deciding on the price of petrol and diesel.
Further, now that the government has decided to set the price of petrol and diesel, it will be interesting to see what happens when the price of oil starts to go up again (That may not happen immediately with Saudi Arabia looking determined to drive down the price of oil to make US shale oil unviable, but its a possibility nonetheless).
The previous Congress led United Progressive Alliance(UPA) government did not allow the oil marketing companies to sell petrol and diesel at a price which was viable for them.
Instead, the government along with the upstream oil companies like ONGC and Oil India Ltd, compensated the oil marketing companies for their “under-recoveries”. This drove a huge hole into the government finances. The total oil subsidy bill during the period the Congress led UPA government ruled the country was a whopping Rs 8,30,000 crore. This along with other subsidies pushed up the government expenditure and in the process its fiscal deficit.
Once the government was borrowing more, it crowded out other borrowers as there was a lesser amount of money available for others to borrow. This pushed up interest rates. It also led to a rupee crisis between late May and August 2013, when the value of the rupee crashed against the dollar.
It had other repercussions as well. But before we get into that it’s important to repeat what Henry Hazlitt writes in Economics in One Lesson: “We cannot hold the price of any commodity below its market level without in time bringing about…consequences. The first is to increase the demand for that commodity. Because the commodity is cheaper, people are tempted to buy, and can afford to buy, more of it.”
This is precisely what happened in India. The demand for diesel went up because for a very long period of time the government completely delinked diesel prices to international oil prices. Hence, there was a substantial difference between the price of petrol and diesel. This led to a huge market in diesel cars. Given this, rich consumers ended up consuming more than their fair share of diesel.
As Hazlitt writes in this context: “Unless a subsidized commodity is completely rationed, it is those with the most purchasing power than can buy most of it. This means that they are being subsidized more than those with less purchasing power…What is forgotten is that subsidies are paid for by someone, and that no method has been discovered by which the community gets something for nothing.” So, while the rich went around in their diesel cars, the nation ended up with a huge subsidy bill.
Like the Congress led UPA before it, the current BJP led National Democratic Alliance (NDA) has decided to set the price of petrol and diesel and not leave it up to the market. There will be great pressure on the government to hold back the price of petrol and diesel, once oil prices start to go up again. And that as we have seen can be disastrous for the economy. 

The article was published on www.equitymaster.com on Dec 5, 2014

UPA destroyed economy. Where will Modi get the money to sort out this financial mess?

narendra_modiVivek Kaul 
The Congress led United Progressive Alliance (UPA) seems to have more or less realized that the 2014 Lok Sabha elections is a lost cause. Hence, the idea seems to be make things difficult for the next government, especially on the finance front.
I had written on this issue on February 17, 2014, the day the finance minister P Chidambaram presented the interim budget. Since then, more details have come out, and these details clearly suggest that things are much worse on the finance front than they first seemed.
A recent news report in the Daily News and Analysis points out that the central government owes the states Rs 50,000 crore on account of compensation for the central sales tax. The newspaper quotes a finance ministry official to point out that a 2% cut in the central sales tax was introduced as a part of the process to phase it out and move towards goods and services tax. The state governments were to be compensated for the losses they had incurred because of this. This payment hasn’t been made for the last three years and the amount has now gone up to close to Rs 50,000 crore.
This is something that the next government will have to deal with. On February 28, 2014, the government raised the dearness allowance of five million central government employees to 100% of their basic salary. This was earlier at 90%. This move is expected to cost around Rs 6,390 crore in 2014-2015. Interestingly, the government had hiked the dearness allowance from 80% to 90% of basic only in September 2013, with effect from July 2013.
The government also approved among the terms of reference for the seventh pay commission, the addition of 50% dearness allowance with the basic pay. This is expected to push salaries of public sector employees up by 30%, that is, if the recommendations of the seventh pay commission are implemented in the time to come. Also, once the dearness allowance of the central government employees is increased, it puts an immense amount of pressure on state governments to increase the salaries of their employees as well.
There are some points from the interim budget that need to be highlighted as well. An amount of Rs 1,15,000 crore has been budgeted against food subsidies for 2014-2015(the period between April 1, 2014 and March 31, 2015). Out of this around Rs 88,500 crore has been allocated under the Food Security Act.
The problem with this number is that the food security scheme is expected to cost much more than the amount that has been allocated. (you can read a detailed explanation here). Also, with Rs 88,500 crore allocated towards food security scheme, it doesn’t leave enough, for the public distribution system that is already in place. As the DNA article cited earlier points out “The next government will have to find a lot of resources for the public distribution subsidy as well. Out of the total Rs 115,000 crore for the food subsidy, the government has allocated Rs 88,500 crore to the Food Security Act.”
And if all this wasn’t enough there are expenditures from the current year that haven’t been accounted for and will spill over to the next year. Estimates suggest that this year close to Rs 1,23,000 crore of subsidies have been postponed to the next year. The next finance minister would have to meet this expenditure.
In fact, in a last ditch effort the government tried to push in nine ordinances before the election commission announced the elections dates. But the President Pranab Mukherjee did not agree to it. As economist Arvind Panagariya points out in a recent column in The Times of India “Perhaps the worst poison pill is UPA’s attempt to push as many as nine ordinances and clear vast numbers of projects on literally the last possible day before Election Commission’s Model Code of Conduct was expected to kick in. Only sage advice from the president held back the government’s hand from pushing the vast majority of these ordinances.”
The Congress led UPA government has left the country in a huge financial mess and the next government will have a tough time dealing with it, from day one. And if they mess it up even slightly, India will end up in an even bigger mess than it currently is.
The opinion polls suggest that Narendra Modi is likely to be the next Prime Minister of India. The great Indian middle class has high hopes from Modi and his ability to get the Indian economy back on track. But the question is where will Modi get the money from, for whatever he wants to do, to set the economy back on track? Close to Rs 2,00,000 crore of government expenditure next year, hasn’t been accounted for.
One way out is to cut down on the subsidies. But will Modi be able to do that, given that he is likely to lead a coalition government. Also, during all the years that the BJP has been in opposition it has supported the populist entitlement programmes, which have led to the government expenditure going up big time. So it is really not in a position to reverse that expenditure even if it is voted to power.
As Robert Prior-Wandesforde, an economist at Credit Suisse in Singapore, recently told Mint “The power of the finance minister in the new government will be key… as will be the administration’s ability to either cut spending on social welfare or match that expenditure through revenue.”
Now that, as the common phrase goes, is easier said than done.
The article originally appeared on www.FirstBiz.com on March 13, 2014
 (Vivek Kaul is a writer. He tweets @kaul_vivek)