This Article is From Jun 29, 2020

Modinomics Is Myopic, Shows Handling Of Fuel Prices

If there's one vice we all share, it is taking our biggest backers for granted. That's exactly what PM Modi is doing to India's middle class. The middle class has already had it tough for the past few years. Things have only become worse since COVID-19 attacked India's already sick economy. Businesses are losing money and white-collar professionals are facing pay cuts and pink slips. In the middle of this economic mayhem, the least the government could have done is to let consumers benefit from the major decline in global fuel prices. Instead, India's consumers are paying more.

Most of this is because central excise duty or tax on diesel has more than doubled, and that on petrol has risen by two-thirds. In fact, the oil PSUs turned out to be more sensitive to the consumer's concerns than the Modi government. They held back any price revision of their share through most of the lockdown. Now, they have more than made up for it through three weeks of almost daily price increases.

Take the price structure of petrol. Oil PSUs get a little less than Rs 26 per litre, and pump owners make Rs 3.60. So, if there were no taxes on petrol, you and I could get it for less than Rs 30 per litre. Let's say that petrol deserves to be taxed at the highest rate of 28 percent. In that case, we would pay about Rs 38 per litre for petrol. Instead, we are paying more than Rs 80. In other words, taxes imposed by the Modi government and VAT levied by state governments amount to a tax rate of 170 percent. That is six times the peak GST rate.

One could argue that those who own cars can afford to pay a little more for their petrol, especially when the nation needs their sacrifice for the greater good. The problem is that car owners are as much in need of financial relief from the government as any other section of the population. This is especially true because social distancing norms are likely to increase their fuel bill significantly. As people begin to go back to offices and shop floors, they will most likely avoid public transport. This will reverse the savings that middle class professionals have made in the past couple of years by switching to Ola & Uber.

If an average person has to travel 50 kms each weekday from home to work and back, they will end up burning 75-100 litres of petrol per month. That is a Rs 6,000-8,000 petrol bill per month, just on work-related conveyance. At a time when incomes are down, people would have preferred to save on their daily conveyance costs by switching to buses and the metro. That is not a viable option in the post-lockdown world for anyone who has a car. So, people need tax cuts on fuel, not tax hikes.

In fact, petrol prices affect the lower-middle class as well. Estimates suggest that about half the households in urban India own two-wheelers, most of which run on petrol. Two wheelers are also an essential 'capital good' for many low-paid jobs, like deliveries, door-to-door sales. Often, people get these jobs if they have a two-wheeler of their own. They are usually given a lumpsum as fuel allowance, and if petrol prices go up, they have to pay the difference from their own pockets.

The case of diesel is even more egregious. Trucks that transport goods across the country run on it. Farmers run their pumps and tractors on diesel. It has a multiplier impact on overall inflation, far beyond its weight in the price indices. For the first time ever, diesel costs more than petrol in some states in India. If diesel had been taxed at 28 percent GST, it would have cost less than Rs 40 per litre at the local pump. The effective tax rate – including state VAT – is 160 percent.  

Diesel is also used directly to power many factories which do not get stable electricity supply. It powers generators across India during power cuts. India's manufacturing sector will already see a jump in the cost of operations, because to maintain social distancing norms, fewer people will work in individual shifts, machines will operate at less than capacity, there will be additional costs of sanitizing workspaces. Now, instead of benefiting from the global decline in the price of a key input, they will end up paying more for it.  

The rationale behind these excessive tax rates is that both the centre and states need money to fight the economic and health impact of COVID-19, and petrol and diesel are the only goods on which they can increase taxes without needing to go to the GST Council. The centre could have easily chosen to borrow more and pass it on to states, instead of extracting more from citizens. Even the IMF, which has historically opposed increased state spending, has tilted in favour of expanding the fiscal deficit in its latest report. It has also called for governments to cut taxes to help both consumers and corporates.

Even if the Modi government cannot give income tax breaks to the middle class, it should have reduced taxes on goods and services. Where one expected temporary reduction in GST rates, we are seeing tax increases on fuel. This is a myopic and cruel way to deal with the current economic crisis.

(Aunindyo Chakravarty was Senior Managing Editor of NDTV's Hindi and Business news channels.)

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