The prices of petrol, diesel and cooking gas are soaring ever higher with every passing day. This rise has had a cascading effect not just on transport but on sectors of the economy too. Consequently, with rising prices, inflation too is rising alarmingly. Finally, the tax burden is falling on the workers and middle class while the super-rich are gifted with tax breaks. Citing reasons for the hike, predictably, the Union minister of Finance Nirmala Sitharaman blamed the oil bonds issued during the previous government. Meanwhile, Union minister of Petroleum Hardeep Singh Puri claimed that the price of fuel is high due to the taxes imposed by the states. Similarly, defending the price hike, the erstwhile petroleum minister, Dharmendra Pradhan had claimed that the fuel tax is being used to finance India’s vaccination program and other welfare schemes. While the present NDA government is justifying the price rise, it is important to unravel the truth behind these claims. For instance, contrary to the claims of the finance minister, during the last eight years, the Modi government has only repaid Rs 3,500 crore worth of oil bonds, while the total excise collection from petroleum products was over 3 lakh crore in 2020-21 alone.
In the year 2020-21, when the entire nation was reeling under the Covid-induced economic distress, the prices of petrol, diesel, and LPG underwent massive hikes. Within just one year, the prices of petrol and diesel increased by over 35 percent crossing Rs 100 per liter, while the price of LPG increased by over 50 percent reaching close to Rs 1,000 per cylinder in many states. The increase in fuel prices not only adds to private transportation like cars and motorcycles but also has a cascading effect on inflation by rising prices in several other sectors of the economy at every step in the production and supply chain. It affects farm food production manufacturing industrial goods services to prices of daily essentials. The increase in fuel prices affects every person, however, it hurts the poor the most, who have to spend a larger portion of their incomes to cover this inflation. The fuel tax is part of indirect taxes that are a form of regressive taxes, collected from excise, GST on various goods and services. Ironically, the fall in tax collection from the rich was made up by increasing the taxes on the poor.
The Modi government has significantly reduced the direct taxes and increased the indirect taxes. Modi’s government abolished the wealth tax. In 2019, the corporate tax was reduced from 30 percent to 22 percent. The fall in tax collection from the rich was made up by increasing the taxes on the poor. While the share of direct taxes in the government’s receipts has decreased, the share of indirect taxes, including the excise duty from petroleum products and the GST, has increased significantly. Alternatively, a fiscal policy that relies on increasing direct taxes on the super-rich needs to be adopted to fill the revenue deficit in the prevailing volatile crude oil prices in world markets arising from the Russia-Ukraine war. Government should resort to control on the retail prices of petro-products and quantitative rationing in the distribution of petro-products to keep the total crude imports restricted rather than relying on a price-rise in these products for doing so.
