Cuts on petrol and diesel prices by the Central government as Diwali relief appears to be more political than economic. This price cut is important for the common man who had been affected rather badly by the pandemic. So, how will these tax cuts impact the economy and the common man and what would be its implication in the short-long term?
In general, the government has treated petro goods as cash cows to generate revenue with little concern for the burden it places on the people unless and until it impacts their political arithmetic. That is also why these goods had not been brought under GST in anticipation that whenever there is a problem, they would increase tax collection.
According to Professor Arun Kumar, who is Malcolm Adiseshiah Chair Professor at the Institute of Social Sciences, “Last year when the pandemic started, the tax collection declined drastically and therefore the government increased the tax (the price of raw material for petrol was down internationally) to increase its revenue. Therefore, last year instead of reducing petrol price they increased it. The VAT levied by states also got increased since it is a per cent of the base price. So, it worked as a cash cow for both the Centre and the state governments. But, since this is an indirect tax, it is inflationary particularly when levied on a basic commodity, like diesel.”
“In the first quarter of 2021-22, tax collection was good but the government is still using petro goods taxation to reduce its deficit. If there is more revenue, the deficit is less.”
The implication of this, when the income of people has declined, is serious. So many people lost their job, and even if they were working, their salary was cut which resulted in reduced purchasing power. Inflation has further reduced the purchasing power and as a result, demand will remain low. Without an increase in demand, the rate of growth will not pick up. In today’s situation, if you increase indirect taxes then the talk of a quick revival of economy will be meaningless. And, if there is slowdown in our economy, it would further create problem for jobs which would lead to many other problems. As a result the government instead of increasing indirect tax should raise resources through direct taxes, said Professor Kumar.
On the tax collection, he said, “In our country around one per cent people effectively pay direct taxes. A few months back, Prime Minister Narendra Modi had said that only one and half crore people are effective taxpayers of direct tax which means 1.1 or 1.2 per cent are effective taxpayers. Right now there is a significant rise in the stock market where some have made trillions of rupees. Therefore taxes should be raised from them and its effect would not be inflationary. The money thus collected could be used to provide social goods. The government has argued that the money from the tax on petroleum goods has been used in health sector, education, vaccination, etc. Which social schemes the government wants to spend money on indicates its priorities.”
On the argument of the government on tax collection being used for social services, he said, “The argument from the government that the money raised from indirect tax collection has been used for health, education and vaccine or vaccination is incorrect. Tax once collected can be used for anything and one cannot say it was spent on this particular item. The money generated from tax collection from X cannot be said to only go to Y. Only in the case of cess is the money specifically allotted.”
On the motive of the government behind tax cut, he said, “The government having seen poor performance in bye-polls immediately announced the tax cuts. It generally happens when elections are close. In earlier occasion also we have seen that the price of petro goods was not increased when elections were to be held but soon after the elections, price was increased. The Government says prices are market determined but that is true to a limited extent and it more a political decision.”
Surajit Sinha, Professor of Economics, Department of Economics Sciences Indian Institute of Technology Kanpur, while sharing his perspective on the tax cut, said, “High price of petrol and diesel in India is more often attributed to high central and state taxes as opposed to high international price of these two items. Although consumers may not like it, the government finds it a reliable source of revenue. State governments in particular benefit from state taxes given that they do not have many lucrative revenue sources. Central government also finds it useful to fund their expenses. But why consumers are not in favour of high prices of petrol and diesel? Not many own cars in India in comparison to developed nations. The section of the population that is most adversely hit in India is the two wheeler owners who run around on their scooters and motorcycles to earn their livelihood. If they were well off, then they would have owned cars. Second, high diesel prices affect transport cost of goods which in turn fuel prices of goods.”
“One advantage of high price of petrol and diesel is some decline in consumption; thereby contribute a bit towards reducing the damages to environment. This assumes less than perfectly inelastic demand functions. The rich is hardly bothered by high prices! Therefore, if governments at the centre and states are not commensurately cutting back on taxes when international prices are rising, one can safely assume that they are not that bothered by the increasing burden on two wheeler owners, the expected rise in prices of goods due to rising transport costs, etc. Why is it so? Are governments that insensitive towards hardships of common man? May not be! The overwhelming need for tax revenue may be outweighing the rising burden of petrol and diesel cost,” said professor Sinha.
“Can governments afford to cut back on taxes? It depends upon their balance sheets. And also on the urgency of the projects they wish to finance. Will the benefits from these projects compensate the high price burden on two wheelers and rising cost of goods that common man use? It is difficult to answer this simply because we do not have access to such details which will enable us to judge the urgency of government expenditures,” argued Sinha.
On the policy of the government, Shankarshan Basu, Professor, Indian Institute of Management, Bangalore (IIMB), said, “In my view the government does not seem to have a credible policy and treats petrol and diesel prices as a means of revenue generation, given the rather inelastic nature of the product and demand. But such actions do have a larger impact in the economy in terms of demand growth and inflation, particularly in an environment where economic activity has been relatively stifled due to a number of factors.”