Union minister Arun Jaitley defended the current level of central taxes on retail prices of petroleum products by arguing that it raises revenue for growth inducing government spending without widening fiscal deficit. It’s an unconvincing argument, mainly because oil taxes were sharply enhanced when international oil prices fell. Benefits of the direct link between international price of oil and local retail price were largely cornered by the government. Now, when crude prices have risen, the cost is entirely borne by the consumers.
What will happen if taxes are lowered? The gains will accrue to consumers. Most of these are likely to show up as higher private consumption expenditure, which will boost the largest segment of gross domestic product. There is no evidence to suggest that extra spending by government is a better way to stimulate the economy. If that is indeed the case, the period between 2008 and 2011 when UPA budgets increased expenditure as a proportion of GDP should have produced good results. Instead, they led to a sharp widening of fiscal and current account deficits and made India vulnerable during the taper tantrum.
The widening deficits were subsequently brought under control between 2012 and 2014 by squeezing government expenditure. Thus fiscal and current accounts deficits had compressed by March 2014 and economic growth picked up – and this momentum continued till 2016. If there’s a clamour for lower fuel taxes today, it’s because the average price of oil in 2011-12 was $111.89, almost twice the level seen last financial year. Yet, retail prices remain at the same level. Allowing consumers to retain some of the gains of lower oil prices can stimulate the economy, and keeping a check on government expenditure will help NDA maintain its record of prudent fiscal management.