Cut fuel taxes: Demand is weak. High petrol, diesel retail prices aren’t helping. And they are stoking inflation

Cut fuel taxes: Demand is weak. High petrol, diesel retail prices aren’t helping. And they are stoking inflation
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Rising crude oil prices combining with weak economic growth impulses should worry policymakers. GoI’s economic mandarins however see it as an opportunity to boost tax revenue. Chief Economic Advisor K Subramanian, in an interview to this paper, said India’s fuel taxes don’t stand out when compared to international levels, particularly Western Europe and Japan. This bears scrutiny.

The price of the Indian basket of crude has increased 50% this year to around $74 a barrel. Retail prices of petrol and diesel are way more because of taxes. In mid-July, petrol was supplied to Delhi’s dealers at Rs 41.39 a litre. It cost the consumers Rs 101.58 because of a 145% mark-up mainly on account of central and state taxes. To compare these numbers with those of Europe or Japan, which are far higher on the economic ladder and have much better public transport, is questionable. Plus, many Europeans and Japanese have been recipients of generous fiscal transfers during the pandemic – most Indians haven’t received such benefits.

Fuel price increase has played a disproportionate role in stoking inflation. In June, the headline inflation, or CPI, was 6.3%. Fuel weightage in CPI is 6.84%, but it contributed 13% of the headline inflation. Beyond that, there are second round effects as transport and communication have about 8.59% weightage in CPI. This segment inflated 11.56% in June. Fuel costs are also feeding into input costs of industrial production.

This trend has come in the backdrop of weakness in aggregate demand. RBI’s take on the state of the economy in June-July indicates that a solid increase in aggregate demand is yet to take shape. It concludes that even GDP growth of 9.5% this year will leave the economy with substantial slack. So, the problem is not one of an overheating economy. It’s one of weak demand.

This is why high fuel taxes now are hurting. Research by SBI using trends in credit card spending shows that as the economy is opening up, spending is being reallocated from groceries to fuel. This will not help firm up domestic demand. Even credit-driven revival packages have inherent limitations. RBI says that flow of banks’ funds through all routes to the economy grew 6.8% as against 9.7% a year ago. With almost half of urban workers employed in the battered services and construction sectors, GoI should cut fuel taxes to put some money in the hands of consumers.

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This piece appeared as an editorial opinion in the print edition of The Times of India.

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