RISING FUEL PRICES AND THE ECONOMY

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 RISING FUEL PRICES AND THE ECONOMY

We have been observing since the last several months the continuous price increase in petrol/diesel prices either by oil marketing companies or by the government through increasing taxes. The oil marketing companies have been increasing the rates in tandem with the price rise in the international market and these companies are no longer compensated by the government by way of subsidies.  Under the circumstances, they have to increase the price with the upward increase in international prices. The government usually reduces the taxes when oil prices increase internationally and vice versa. However, we observed, the government is no more sticking to this policy and keeping taxes unchanged even when the oil prices in the international market have been increasing regularly. The revenues from taxes on oil is very huge and the government does not want to part with it as the central government is having a large fiscal deficit owing to heavy spending on the healthcare sector to fight against the pandemic. Although their claim to some extent is justifiable as the central government have to earn extra revenues for spending on healthcare now. However, their irrational move to keep on increasing petrol/diesel prices has been becoming detrimental to the Indian economy.


We are surprised to know that tax collection from oil has even surpassed the income tax collection as well as corporate tax collection in FY21. 


Total Tax Collection from Oil  :  Rs. 525355.00 Cr.

Total IncomeTax Collection    :  Rs. 469226.00 Cr. 

Total Corporate Tax                :  Rs, 457180.00 Cr. 


The Central government must now go for the other sources of revenue to meet their additional fiscal demand. This heavy regressive tax has been impacting the spending of a common man. Their disposable income has been reducing owing to the increased monthly oil bill. The reduced disposable income is affecting the demand as people cut the allocation of the other household expenses to compensate for the extra fuel cost. This trend would likely to be a deterrent factor for the economy in the medium term. There are about 300 million vehicle users in India and their average spending on fuel has increased almost 25% in the last one year. 300 million is a very large number and if their disposable income is affected owing to the price increase in fuel, it means a lot for the economy.  The Central government on the one hand has been putting in all efforts to bring back the GDP growth on track and on the other hand their irrational fuel pricing policy is negating their own efforts.


The freight charges of transportation of goods are increased due rise in fuel cost which has been impacting prices of all the material. As a result, we have been witnessing higher inflation month on month. Since we have been undergoing through a severe shocking phase arising out of the horrible second wave of covid-19, at this juncture, we are not in a position to absorb the inflationary pressure of any kind.



Looking at the revival in the global economy after easing down of the pandemic effect, the international oil prices are likely to remain dearer in the medium term and some oil experts are forecasting the crude prices to touch the level of even $90-100 by 2022. Under the circumstances, our policy makers must look into the matter seriously and find out an amicable solution for fuel price mechanism. The central government should now look for some other source of revenues for meeting their fiscal demand and ensure that taxes on fuel are reduced to a justifiable level. Privatization of PSUs through divestment of state holding, assets monetization of state owned companies could generate a handsome amount for the government to keep their spending intact for the revival of our economy. As per the news published in Times of India in March 2020, Value of enemy properties stands at Rs.one lac crore as officially declared by the Indian government. The enemy property refers to any property belonging to, held or managed on behalf of an enemy, an enemy subject or an enemy firm. This huge $15 billion valued property has been lying idle since long. This government has a majority in both the houses of Parliament and if they wish, they could easily move a bill to monetize the same for the nation’s interest.  

Better late than never and the government should act now in the matter.

Hoping for a better future ahead!


-Rajendra Jhanwar


 


  


   

     


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