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The pump prices of petrol and diesel have seen a relentless increase in October. They exceed Rs 100/litre in most parts of the country.
The proximate cause for the increase in pump prices is the rise in crude price. A barrel of the Indian crude basket was $83.21 towards the end of last week, higher by around 60% since June.
There’s nothing the GoI and state governments can do about the international price trend of crude. That leaves only the taxes levied by both levels of government that are amenable to change and provide the route for relief to consumers. GoI’s taxes are a fixed sum per litre and thereby uninfluenced by the price of crude. States, generally, levy a combination of fixed sum taxes and a percentage of the price of petrol or diesel. On October 16, petrol in Delhi cost Rs 105.55 per litre. A breakup of the price showed that 58% of the retail price went towards taxes and dealer commission.
An important point here is that over the last two years, GoI has reworked the nomenclature of its excise duty on pump prices in a way that allows it to keep almost all of it. States complained about it to the 15th Finance Commission as they feel they are deprived of their fair share. But what is certain is that as both levels of government try to protect their perceived share of taxes, it is the consumer who bears the burden. GoI’s economic defence of the burden is that it is necessary to provide public goods. This argument is both conceptually flawed and also inconsistent with evidence. GoI and states use a variety of taxes to fund their activities. For GoI, excise duty from fuel is lower than collections from income tax, corporate tax and central GST.
In short, excise collections from retail price of petrol and diesel are not the foundation of government finances. Any reduction in fuel taxes can be offset elsewhere. What the large levy on retail fuel price does is affect different sections of the population in varying ways. In India, more than 80 of every 100 private passenger vehicles sold are entry level two wheelers. They represent demand for a section of the population that has a limited financial cushion and is also vulnerable to price shocks.
Given how weak aggregate demand remains, the current fiscal policy on retail price of petrol and diesel has put more stress on household budgets. From both economic and welfare standpoints, the current taxation policy on petrol and diesel is flawed.