This is an issue that The Wire has extensively reported on and analysed. In short, in India, depending on which state you live in, taxes currently make up anywhere between 45%-52% of the retail price of petrol and diesel. After the Modi government assumed power, international oil prices plunged, but the taxes remained the same (and were later hiked). Consequently, the Centre’s tax revenues from petroleum products rose from Rs 99,000 crore in 2014-15 to over Rs 2 lakh crore in 2017-2018.
Between 2014-15 and 2015-16, the Centre hiked excise duty on auto fuels nine times. Excise duty on petrol and diesel was Rs 9.48 and Rs 3.56 a litre respectively before the Modi government took office. However, through repeated hikes, it jacked up duty to Rs 21.48 and Rs 17.33 a litre, an increase of 226% and 486% respectively over the May 2014 level. This even though global oil prices fell from above $100 a barrel in 2014 to around $40 by early 2015.
What has sparked the current political debate around rising fuel prices is that since late 2017 , the price of Brent crude has steadily risen back up to $78 a barrel, which has in turn put a spotlight on the Modi government’s practice of high oil taxes.
The oil-tax windfall that the Modi government reaped has gone a long way in bridging India’s fiscal deficit. Unfortunately, this no longer seems tenable with a plunging rupee and rising global prices.
The oil conundrum that the Centre currently faces – on whether it should cut excise duties and risk breaching its fiscal deficit target – has given rise to the BJP’s questionable narratives surrounding high oil taxes.
Crumbling defences
Infrastructure argument: In May 2018, when fuel prices started rising, several senior central government ministers stated that keeping higher oil taxes allowed the Modi government to invest in infrastructure. For instance, law minister Ravi Shankar Prasad stated that the Centre’s high excise duties on fuel were not cruel but had instead helped fund India’s development by allowing the government to build highways, dams, electrical grids and optical fibre networks.
“So tax on fuel is linked with developmental issues. We understand that there is a compelling need for a long-term solution, structured solution (to deal with the present situation),” Prasad said.
However, as The Wire and other estimates have noted, an analysis of the Centre’s oil-tax gains show that it wasn’t funneled into capital expenditure spending (i.e., on infrastructure) but was instead mostly spent on shoring up revenue expenditure. By doing so, the quality of India’s fiscal deficit actually deteriorated in 2016-17.
State tax argument: Another defence put forth by the Modi government and the BJP is that state governments across the country need to take steps and reduce their own taxes on petroleum products. States in India charge taxes using ad valorem rates which means they reap windfall gains due to a price rise. While this argument is true, it is also hypocritical. The Centre has also reaped a windfall gain through excise duties so it can’t blame states for doing the same.
The Modi government also forgets that 22 of the 29 state governments in India are run by the BJP or its allies. It would be ideal if the party asked its state governments to walk the talk.
The only state governments that have taken steps to reduce the price of fuel so far are Kerala, which has reduced petrol and diesel prices by Re 1 per litre, and Rajasthan, which cut VAT to bring prices down by Rs 2.5 a litre.
Maharahstra, which has the highest effective valued-added tax (VAT) on petrol hasn’t taken any concrete steps although chief minister Devendra Fadnavis has promised to consider taking steps in the future.
Consumption argument: Closely on the heels of its odd charts and graphs is another bizarre argument being put forth that India’s citizens need to consume less petrol. Rajasthan’s state minister Rajkumar Rinwa on Monday, perhaps in response to the Congress’s Bharat Bandh, stated that Indians needed to take a hit for national interest.
“People do not understand the fact that when prices of crude oil increase, they should reduce their expenditure. In other countries, there is a national character, and people cut down their consumption,” Rinwa said.
While this narrative is not popular, it is an indication of how difficult it is becoming for the Modi government to justify high oil taxes and adhering to a strict fiscal deficit target in the face of rising petrol and diesel prices.