Since October 4, 2017, when the Modi government announced a Rs 2 per litre cut in the central excise duty on fuel, petrol prices in the metros have gone up by 10-13 per cent, depending on the city, while diesel prices have spiked by 17-20 per cent. A new all-time record is being set every day now; petrol is currently priced at Rs 84.99 a litre and diesel at Rs 72.76 in Mumbai.
Facing flak from consumers and the opposition alike, the government is finally making all the right noises about intervening soon. According to The Business Standard, Petroleum and Natural Gas Minister Dharmendra Pradhan is expected to meet officials of the Oil Marketing Companies (OMCs) today to take stock of the situation, while the finance ministry has been deliberating whether to cut excise duty a second time to roll back prices. Currently, the excise duty on petrol stands at Rs 19.48 per litre and Rs 15.33 per litre on diesel.
“The PMO has been provided data and inputs from OMCs. For the last one week, discussions have been going on regarding an excise duty cut, and a decision is imminent,” a finance ministry official told the daily. The cut is reportedly likely to be in the range of Rs 2 to Rs 4 a litre, and government may ask Indian Oil Corporation (IOC), Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum Corporation (BPCL) to freeze prices as a temporary arrangement.
This development comes a day after BJP president Amit Shah told the media that the government is “trying to work out a formula to reduce the prices in the next three to four days”.
It won’t be an easy decision for the government. As BusinessToday.In has previously pointed out, in April, taxes amounted to 47 per cent of the price paid by the consumer in petrol and 38 per cent in diesel. But every Re 1 reduction in taxes per litre of fuel causes a Rs 13,000 crore annual loss to the exchequer. Neither the Centre nor the states have the financial strength to take this hit. Especially at a time when the benchmark Brent crude oil price is repeatedly flirting with the $80 a barrel mark, for the first time since 2014, which is inflating India’s import bill and threatening the fiscal position. India’s crude basket which was at $52.49 in April 2017 is now well over $72. If crude gets to $100, pundits say that India’s price could be $93 for the full year.
According to the daily, an excise cut of Rs 4 a litre could spell a revenue loss of up to Rs 56,000 crore, and assuming all other factors, sources of revenue, and expenditure commitments remain constant, this could lead to a fiscal deficit of Rs 6.80 lakh crore, or 3.6 per cent of the nominal GDP projection for the current fiscal.
But former Finance Minister P. Chidambaram believes that the government can afford to cut up to Rs 25 per litre in petrol prices but won’t do so. In a series of tweets this morning, Chidambaram further claimed that the government will instead “cheat the people by cutting price by Rs 1 or 2 per litre of petrol” and that “Bonanza to central government is Rs 25 on every litre of petrol”.
If the government does bite the bullet on an excise duty cut, it may ask the states to follow up with a cut in their respective value-added tax (VAT). But the Centre will need to crack the whip hard on this one. Just four states – Maharashtra, Gujarat, Madhya Pradesh and Himachal Pradesh – and one union territory had heeded the government’s call to lower VAT in line with its October excise duty cut.
A tougher option could be to finally bring fuel under GST, which has been dangled as a lollipop for a long time. Even at a prohibitive 18 per cent GST, petrol would barely cost Rs 45.75 per litre in Delhi but this will obviously require the Centre as well as the states to together take a very courageous haircut. Bringing fuel under the GST will reduce the government revenue from tax collected from fuel by nearly Rs 2 lakh crore.
Source: Business Today