Higher excise on petrol, diesel is bad economics, bad politics

The government’s decision to increase the excise duty on petrol and diesel, the third time in a two months, is understandable but it can scarcely be called justifiable. For, while it is prudent to restore the public finance, doing it by depriving the people of their due is disingenuous.

To be fair to the Narendra Modi regime, it inherited a strained exchequer, thanks to the mindless populism and skewed policies of the United Progressive Alliance (UPA) government. This is evident from the fact that the fiscal deficit for the first seven months of this financial year amounts to Rs 4.76 lakh crore, almost 90 per cent of the target of Rs 5.31 lakh crore for the entire fiscal. The deficit was below Rs 1.26 lakh crore in 2003-04.

The way out, however, is not by cheating the citizens of India. Petrol and diesel have been decontrolled, but their prices have been brought down only by 11 per cent and 8 per cent, respectively, since June this year, though crude has declined by more than half in the same period. By refusing to bring down fuel prices in correspondence with international crude, the government makes a farce of the stated policy of decontrol. It is also wrong on three counts.

First, it is dishonest to deny the benefits of a dip in international crude prices to the people when they were forced to pay more when the crude price soars. In September 2012, former prime minister Manmohan Singh made a case for reduction in petroleum subsidies. Discussing the rising (at that time) crude prices and our dependence on imports, he had famously said that “money doesn’t grow on trees.” The next year, however, his government, under tremendous pressure from Congress president Sonia Gandhi, got the fiscally and economically ruinous food security law. As if money had started growing on trees! The denouement was 2014. You can’t fool all the people all the time. Modi, who endeared himself with the electorate because of personal honesty and the promise of proper economic management, cannot afford to be seen as a cunning politician.

Second, if fuel prices are allowed to fall, it would result in greater buoyancy in tax collection—may not be in the short run but surely in the medium- and long-term. When people have more money left in their hands—which will surely happen if fuel prices are lower—they would spend more, thus resulting in more consumption, brisker economic activity, and fatter indirect tax kitty. And we are not even talking about the political and electoral gains.

Further, cheaper diesel would have a salutary effect on inflation. This is particularly important because the Reserve Bank of India has made it clear that it would bring down key rates, so important for industrial revival, only if prices are reined in. The government is likely to get Rs 20,000-Rs 21,000 crore revisions annually from the two upward revisions of excise duty. Economic revival can bring much more to the exchequer.

Finally, it is unwise to link fiscal prudence with luck. The crude is cheaper not down because of some action of our government or country; it is mainly because of the shale phenomenon in North America. The Modi dispensation, along with the people of India, is just fortunate to reap the benefits of the developments on the other side of the world. Fiscal responsibility and economic revival, however, must have far solider foundations than serendipity; the foundations should be so strong that the public finance remains sound and development continu