A report by the Comptroller and Auditor General [CAG] tabled in Parliament on March 10, 2017 brings out that in recent years, there has been a sharp increase in the Union excise duty collections, a predominant share of this accounted for by increase in excise revenue on petroleum products.
During 2013-14, total excise collection was Rs 169,000 crore of which contribution of petroleum products [POL] was Rs 87,880 crores or 52%. During 2015-16, even as overall excise revenue increased to Rs 287,000 crore, contribution of POL went up to Rs 198,030 crores or 69% of the total [with sin products like tobacco accounting for another 10%, these two categories alone make up 80%].
During this period, there was massive increase in levies on petrol and high speed diesel [HSD]. The excise duty on petrol increased from Rs 1.2 per litre in 2013-14 to Rs 8.95 per litre during 2015-16 – 7.5 times. Similarly, the excise duty on HSD went up from Rs 1.46 per litre during 2013-14 to Rs 7.96 per litre in 2015-16 – 5.5 times. Quite clearly, this was the sole reason for ballooning excise collection.
This also happened to be a period when there was a steep fall in the international price of crude oil [and corresponding decline in the price of POL] from a high of $117 per barrel in mid-2014 to as low as $30 per barrel in 2015. Considering that India imports 80% of its oil requirements, the government got a big bonanza and a good part of it was mopped up by increase in excise duty on petrol and HSD.
The mop up has been hugely instrumental in helping Modi – dispensation in its fiscal consolidation efforts even while stepping up capital expenditure and spending on social welfare. True, the government achieved significant saving by plugging leakages in implementation of welfare schemes e.g. subsidy on LPG and food, payments under MGNREGA etc. But, all this is small when compared to the help from higher excise duty on POL.
The present highly skewed pattern of tax revenue collection is inherently unsustainable. A sharp upturn in the trajectory of oil prices has the potential of destabilizing the apple-cart. Indeed, the possibility of this happening in the near future is not ruled out.
According to International Energy Agency [IEA], the global demand-supply balance for crude is anticipated to get converted in to a deficit by middle of 2017 even as the members of OPEC [Organization of Petroleum Exporting Countries] as well as non-OPEC countries led by Russia are poised to stick to the cuts they had agreed upon in November/December, 2016 by 1.2 million barrels per day and 700,000 barrels per day respectively.
When, the oil prices shoot up and the bonanza starts disappearing, the government will be faced with a ‘Hob-son choice’. If, it keeps current excise duty levels on petrol and diesel intact, their retail prices will go up sharply [already deregulated June, 2010/November, 2014] which will have catastrophic consequences not only for the economy but also from a political perspective.
Considering their widespread use in almost every sector, the steep hike in price especially of HSD will have cascading inflationary effect. The increase in food prices in particular, will hit majority of the poor hard. In such a scenario, one can expect the Reserve Bank of India [RBI] to abandon its current accommodating/neutral stance. It will become hawkish and increase interest rates which will affect growth.
Politically, this will give a serious jolt to the image of the ruling BJP establishment. Already, during the just concluded state assembly elections, opposition parties lambasted it for small increase in LPG price [for those outside the subsidized quota] linked to movement in global price. Imagine, the tirade against Team Modi in the event of steep hikes in price of diesel and petrol!
On the other hand, if, the government rolls back increases in excise duty in order to keep retail price unchanged and thus protect consumers, this will drastically reduce revenue and undermine its fiscal consolidation efforts. It will also end up seriously jeopardizing capital expenditure and spend on social welfare schemes.
It is therefore, imperative that all out efforts are made to diversify the revenue basket and cut unproductive expenses so that dependence on POL is reduced. 4 areas need focused attention.
First, following demonetization, hundreds of thousands crores in unaccounted money has come to the banks. About 4000 companies/entities alone have deposited over Rs 100,000 crores. I-T department should vigorously pursue all such cases to get the taxes due from them. It should also keep their future income on its radar and ensure that taxes are paid.
Second, hopefully, all GST [Goods and Services Tax] related bills will be passed in the current session of parliament to ensure that it takes effect from July 1, 2017. In this regard, the implementation machinery at all levels viz. centre, state, union territories [UTs] should be comprehensively dovetailed to capture all transactions and collect taxes legitimately due to the government.
Third, according to CAG, the government has been losing huge revenue by giving exemptions to industry. During 2015-16, the revenue forgone on excise duties was Rs 225,000 crores. This was over 78% of total revenue earning from central excise. The exemptions were granted in the past to deal with circumstances of exceptional nature, but these were never withdrawn. Under GST dispensation, there must not be any place for exemptions.
Fourth, Team Modi should implement long pending subsidy reforms in food, fertilizers and petroleum products [LPG and kerosene] to target subsidy, eliminate leakages and improve efficiency in delivery systems. The focus should only be on the poor excluding all better-offs from the ambit of subsidy. As a matter of general policy, the government should refrain from giving sops.
The practice of giving loan waivers needs to be shunned. After Modi promised this to farmers in Uttar Pradesh, all opposition members have demanded that this be extended to all over India. Such practice should be nipped in the bud. If, any state wants to go ahead, required funds should come from its budget instead of making banks to bear the brunt.
In short, the government should fire all cylinders to maximize revenue collection and trimming expenses. Meanwhile, efforts should be intensified to increase domestic production of oil so as to reduce the vulnerabilities inherent in high import dependence.