After a continuous and steep rise in the price of petroleum products over a period of a fortnight, the goof up on one paise reduction in the rate of petrol led to a flurry of jokes on the social media and huge embarrassment for the government but what is worrying is the cascading impact it is having on the country’s economy.
For the Modi government, the crisis could not have come at a worse time after a string of defeats in by-elections and the near miss in Karnataka. It had been having a free run over the last four years with the low international prices of crude. In fact it allowed oil companies to keep the rates steady despite the sharp fall in the international prices. It did attract criticism that it was not allowing percolation of benefit to the consumers despite a fall in the global crude rates.
Now a combination of increase in the crude rates, touching US $80 per barrel, and the decline in the value of Indian Rupee, has put the government in a fix. Moody’s, the only agency to have upgraded the country’s sovereign rating, had revised down its GDP growth estimate to 7.3 per cent on rising oil prices earlier this week.
At the heart of the problem is the fact that petroleum products, besides attractive revenue from alcohol, are cash cows for both the central government and the states. Both levy tax on petrol, diesel, crude, and natural gas. The Centre charges excise duty, while each state has its own Value Added Tax (VAT). This is besides the commission payable to dealers which together inflates the bill for the consumers to nearly double that of the actual price.
For instance, the central government earned Rs 2.42 lakh crore through excise duty on these products during the 2016-17 financial year even though the global prices were low. This earning placed the country’s economy in a healthy position. States too earned Rs 1.66 lakh crore through Value Added Tax (VAT) during the last financial year.
For instance, Maharashtra, where the rates of petrol and diesel are the highest, earns over Rs 20,000 crore every year. Thus no government would like to forego the money yielded by the sale of petroleum products. Most states had, therefore, evidently not favoured bringing petroleum products like petrol, diesel, natural gas, crude oil and jet fuel under the new Goods and Services Tax (GST).
While the common man is reeling under the burden of increased rates, political leaders too have been cornering the government. They point out that the BJP is a ruling party in 21 states and could easily ask these state governments to lower the state levies. Shockingly the variation in rates of petrol, for instance, is over Rs 10 per litre in different states with Maharashtra one of the leading states to charge higher rates.
“For the last four years, the BJP government has lived off an oil bonanza. Minus the oil bonanza, the BJP government is clueless and floundering. Even a school child knows the answer. It is because of the ‘Tax the Consumer’ policy of the BJP government,” said former finance minister P Chidambaram.
Insiders also point out that some of the top private companies in the business, the Reliance and Essar Groups, may be putting pressure on the government to not force a cut on their profits. After all these companies are among the biggest source of funds for elections.
It has now mooted the proposal to bring petroleum products under the ambit of GST for a uniform tax structure across the country. Depending on the recommendations of the GST Council the rate could be fixed between 18 per cent and 28 per cent. Though this may take heat away from the central government, the states may find ways to levy additional surcharge.
While the government takes a decision, it is the common man who is at wit’s end. Prices of all commodities have been steadily rising and unscrupulous middlemen are making most of the situation. Even as the after-shocks of the demonetisation and the roll out of the GST is being still felt in the economy, the sharp increase in petroleum products has worsened the situation.
The Modi administration shall have to find ways and means to control runaway inflation. It can well start with severely cutting down on wasteful government expenditure and taking strict action against those fishing in troubled waters.