Fuel has been a long-time great economic and political tool in the hands of the government in India. It enables the government to make windfall gains when crude prices fall, and with the earnings, it makes its budgetary allocations according to its policies, which cater to its whims and fancies. It has never passed on the benefits of lower international prices to the citizens. But whenever crude prices rise, the government immediately makes the people pay for it instead of cushioning them against the shocks. The whole economic-political calculus, however, changes when elections are around the corner.
Then the government tries to project itself as a friend of the people, coming to their rescue. India is now going through this phase, when the war in West Asia has caused an unprecedented global fuel crisis at a time when four states and one Union Territory are going to the polls. The government now seems to care more for the ruling party’s political cost than the rules of economics it should follow. It reduced the Central excise duty on petrol and diesel for domestic consumption by Rs 10 a litre on 27 March. The move benefits oil marketing companies (OMCs) directly but not the consumers.
Also Read
Only an indirect benefit accrues to the people by cushioning them from higher prices. Before the war, global crude benchmarks were hovering around $70-75 a barrel, which translated into a domestic fuel cost of about Rs 40 a litre. But it was sold above Rs 100 after accounting for refining, freight, Central excise and state levies, dealer commissions and OMC margins. Within this, Central excise comprised the biggest component. But now, Indian OMCs are losing about Rs 48 a litre after absorbing the ongoing rise in global crude prices.
According to Petroleum and Natural Gas Minister Hardeep Singh Puri, Central excise stood at about Rs 24-30 a litre for petrol and diesel, and by forgoing a part of it, the government is taking a huge hit on tax revenue. This, we must understand, is not generosity in any manner.
The government also imposed export duties on diesel and aviation turbine fuel, ensuring adequate domestic availability. Officials say the moves attempt to shield Indians from the global price and supply shocks amid the West Asia crisis. But truth be told, the actual reason behind the duty cuts is the Assembly elections due next month. The move gives a temporary breather to consumers for now.
No other item causes as much volatility in the Indian economy as oil prices. When global crude rises, inflation anxieties spread quickly across households, transport costs ripple through supply chains, and governments scramble to contain the political fallout.
India imports roughly 90 per cent of its crude requirements, which makes it a key component in its fiscal and political calculations. What could have been a technocratic debate about tax policy has now become a politically sensitive issue because of the Assembly elections.
As of March, the Centre collects about Rs 21.90 per litre in excise duty on petrol and Rs 17.80 per litre on diesel, through a layered structure that includes basic excise duty, special additional excise duty, road and infrastructure cess, and the agriculture infrastructure development cess. These levies generate enormous fiscal income. Central excise collections from petroleum products have averaged about Rs 2.6–2.7 lakh crore annually in recent years, making fuel taxes one of the government’s largest non-GST revenue streams. That is also a major reason for fuel not being included under the GST umbrella.
The current volatility illustrates the problem vividly. Brent’s surge to $115 — even though temporary — has rekindled fears of rising pump prices. In an election season, the optics of expensive fuel can quickly overshadow broader economic narratives, which, anyway, are not holding much strength for this government currently. The ensuing polls have, without doubt, made the government cut excise duties to soften retail prices and signal relief to voters for a very limited period. It is not bothersome that such relief is expensive. Each Re 1 reduction in excise duty costs the exchequer roughly Rs 13,000–16,000 crore annually. Even the modest cut could therefore wipe out tens of thousands of crores in revenue at a time when the government is attempting to narrow the fiscal deficit while sustaining high infrastructure spending.
For obvious reasons, the government would not mind incurring the additional expenditure if it gives them huge electoral dividends. The stakes are too high this time with electoral fortunes in key states such as West Bengal, Kerala and Tamil Nadu going to be decided. Whether the duty cuts would prevail in May if the global prices stay higher for longer and the electoral verdict is known is not a very big guess.
