Good Politics & Economics
The right thing to do on product taxes is to keep levies reasonable, and garner higher revenues from sales volumes. But every law needs an exception, and the exception to this rule is the carbon tax. When fossil fuels are depleting, and causing damage to the environment, product taxes on petro-fuels (and coal) should be higher than normal. In India, this is exactly the route we have taken, even though the reasoning of the government may have been fiscal consolidation.
We import over 80 per cent of our crude oil, but have to use lots of coal for power generation. Carbon taxes are indirectly levied in two ways: while the royalty and tax element on coal is lower than that for oil, auctioning coal mines to the highest bidders effectively makes its cost higher. Ever since global oil prices started crashing in 2014, the NDA government has raised excise duties, and state governments have hiked VAT, making the effective prices of petrol and diesel almost what they were when crude prices were twice today’s levels.
The logic behind higher taxes may not be environmental considerations and the states just want more revenues for their populist schemes. This has effectively achieved a tax rate high enough to prevent excessive growth in imported petro-product consumption.In the last fiscal, the Centre and states collected more than Rs 4.6 lakh crore in taxes from petro-fuels, restricting overall growth in diesel and petrol consumption to 1.5 per cent and eight per cent, to an average of five per cent.
This is sensible politics. While it is easy, and populist, to cut prices when global crude prices crash, it is very difficult to raise prices when global crude is on fire, as had happened during the UPA regime. So taxing petro-fuels at high levels is commonsense, for this allows some leeway to moderate price increases when global oil rises, by cutting taxes without causing losses to the oil companies, or allowing public anger to spill out onto the streets. It is worth recalling that UPA-era subsidies on petro-fuels topped Rs 8,37,000 crore between 2005-06 and 2013-14; add the subsidies in 2004-05, the first year of UPA, for which data isn’t available, we are talking of subsidies in excess of at least Rs 8,50,000 crore.
While many will support subsidies for some fuels – kerosene and cooking gas – there is no logic in doing so for petrol, used by people using cars and bikes. It does not make sense to price diesel, used for goods and mass transport, below the levels at which marketing companies make losses. The big hiatus between diesel and petrol prices (Rs 70.39 and Rs 58.74 per litre in Delhi) suggests that diesel is taxed far lower than petrol, with mass transport getting a better deal than class transport. So, when we organise media debates and political rallies against the government for “fleecing petrol and diesel customers”, we are essentially saying that, no matter what, governments must not collect carbon taxes, or use the proceeds to build infrastructure.
Now, how sensible is that? Learning from the UPA’s failures, the NDA has wised up to the reality that petro-fuels must be taxed high when global prices are low and lower when crude prices rule high. It is sheer lunacy to argue against good politics, good economics.
