Amid political duels over fuel prices, the govt must keep consumers’ interests and revenues in mind

Rising fuel prices have proved to be a good political stick to beat the government with. It happened in the run-up to the general elections in 2014 and it is happening now. Finance minister Arun Jaitley appears to have lobbed the oil prices issue back into the opposition court on a day when the election commission announced polls for five states. But that is even as the consumer worries that fuel prices might touch Rs 100 a litre at retail outlets. The lowering of prices was effectively Jaitley’s dare to opposition-ruled states to lower taxes at their end so that the consumer could benefit. This is a challenge that non-BJP ruled states have ignored.

The finance minister may be right in the sense that state taxes and duties form the major chunk of petrol and diesel prices levied on consumers at retail outlets. First, the Centre shares about 42 per cent of its oil tax revenues with states. On the other hand, states separately levy an average about 29 per cent as value-added tax (VAT). Hence, there is a serious case for states to provide matching relief like the Centre. Alternatively, state finance ministers can accept oil minister Dharmendra Pradhan’s proposal to bring petrol, diesel and aviation turbine fuel under GST. However, this is easier said than done because such a step will need consensus. Besides, states might consider raising taxes elsewhere to ensure there is no overall revenue loss to them. The third option that could possibly be considered is setting up a revolving fund of sorts with contributions from states and the centre to tide over the difficult situation owing to high crude prices. The fourth option could be issuance of tax-free oil bonds as an investment avenue for subscription by people to mop up long-term funds requirement.

There is no point in making a big political controversy of oil prices by opposition parties or the ruling NDA. Finding innovative solutions to oil induced misery on consumers should be the way out. Besides, the government has to be successful with this balancing. For instance, after fuel prices were reduced by the government diktat, the finance minister had to immediately announce that there would be no going back on fuel price deregulation.

Another point that Jaitley made was apart from the two-time cut in petrol and diesel prices, the NDA government managed to provide income tax relief worth Rs 97,000 crore annually to different classes of taxpayers. This is in addition to lower tax incidence after introduction of the goods and services tax (GST) in July 2017. Jaitley seems to have made a larger point on the taxation policy that is debatable. The moot point is that the NDA government has no control over crude prices in international markets especially after the US imposed sanctions on Iran and restrictions on Russia and North Korea. Consequent to these decisions, the uncertainty in oil supplies stare India in the face. Shale gas from US companies at competitive prices may not be available to bridge the immediate deficit faced by high-growth large economies like India.

High crude prices have also had an impact on currencies of most emerging economies led by India. While this puts pressure on the current account deficit (CAD) that may widen beyond 3 per cent, it has led to downslide in the rupee thereby building core inflationary pressure in the economy. The government has done well to hold on with measured policy interventions even though this has not enthused retail consumers given the hole it is burning in their pockets. High interest rates and high inflation continue to threaten disruption of the India growth story. Jaitley has a tricky job of managing his numbers, keeping consumers happy in an election year and at the same time take on the opposition that is out to make political capital of the challenges to the economy.