Let’s draw a line on financial repression through fuel taxation
On June 30, the Reserve Bank of India (RBI) released its monthly tables on sectoral bank lending. During the current financial year (period from May 21 to March 26), credit to industry contracted, with the exception of credit to medium-sized industries. Over the same period, consumer credit (“personal loans”) declined 0.9%. This can be a mixed blessing as almost half of the reduction in rupee terms is due to a drop in credit card outstanding.
A week earlier, the central bank released data on household financial assets and liabilities through December 2020. This reflects the impact of the first wave of covid. Both in terms of flows and stocks, the net financial assets of households improved compared to the previous two years. Even excluding investments in financial markets, the conclusion holds. But the second wave occurred in 2021 and that effect is not yet in the data. We therefore do not yet know the full impact of the pandemic. But it’s possible to guess the full picture through the previews we have, and it’s not pretty.
According to provisional estimates for 2020-2021, private final consumption expenditure decreased by ₹7,400 billion compared to 2019-2020. Second, in the latest consumer confidence survey released ahead of the RBI monetary policy meeting in June, households’ expectations for the general economic situation, income, employment prospects, and spending intentions on non-goods. essentials had deteriorated significantly compared to the previous survey. This survey was carried out between the end of April and mid-May, at the height of the second wave.
In its State of the Economy report published as part of its June monthly bulletin, RBI noted that the government’s fiscal stimulus to the economy in terms of increased spending was in the order of $ 2. 4% of GDP in 2020-2021. If we deduct 0.8%, the estimated impact of the introduction into the budget of a food subsidy that was previously off-budget, then the fiscal stimulus for the year is reduced to a more modest 1.6% of GDP.
The government’s finances appear to be in much better shape than feared. On July 1, after seeing the government tax figures for April and May 2021, a knowledgeable friend wrote that his gross tax revenue as a proportion of the annual budget was 14.1% in the first two months and that it was was the highest. in 20 years. Direct tax deductions as a percentage of the budget in the first two months were also the highest in 20 years.
In his latest “Ecowrap,” dated July 9, the State Bank of India group’s chief economic adviser, Soumya Kanti Ghosh, argues that if state governments implemented reforms, it would allow them to benefit from additional borrowing capacity of ₹1.77 trillion, offsetting more than their potential shortfall of ₹1.05 trillion. Similarly, between the collection of the goods and services tax (GST) and the additional levies on petroleum products, the Union government could also collect additional tax revenues of ₹1,800 billion compensating for the shortfall, if any, of non-tax revenue.
According to Mycarhelpline.com, the pump prices for gasoline and diesel in Delhi as of July 5, 2021 were ₹99.36 and ₹89.36 per liter respectively. The cost of crude oil per liter was ₹35.73 per liter. After taking into account crude oil processing costs, refining margin and dealer’s commission, 56% of the final gasoline price includes taxes. In other words, Union and state government taxes constitute 125% of the non-tax components of the price of these fuels.
The consumer price inflation rate was 6.3% in May. Two components have a direct relationship with fuel prices. One is directly called combustible products. This represents a weight of 5.6% in the basket of the consumer price index. Another is “Transport & Communication”, with a weight of 9.7%. These two components have an annual inflation rate of 12%. So, together, they contribute 1.8% (about 30%) of the annual inflation rate of 6.3%. Of course, fuel indirectly contributes to higher costs and prices of other items (or squeezing margins on them).
Two weeks ago, this column suggested that the government undertake a technical study on the integration of petroleum products under the GST. SBI’s Ghosh had already done the heavy lifting. In a research note published in March, he estimated that including them in the basket of the GST at the maximum rate of 28% plus a tax to offset state value-added tax would reduce prices to ₹84 for gasoline and ₹77 for diesel, resulting in a combined net revenue loss of 0.4% of GDP for Central and States. It deserves serious thought. It is time for the government to end the use of indirect taxes, especially fuel taxes, to consolidate its fiscal position.
Indirect taxes are regressive because they prevent the economy from functioning at the frontier of production possibilities, lower the potential growth rate of the economy and thus reduce the income accruing to the factors of production. Such a tax policy is, say, a “public evil”.
Over the past year, many countries around the world have chosen to support household finances to the detriment of public finances. India may not have the favorable terms it did have, nor does the country have to replicate the scale of its aid. But the current situation is far from optimal for the health and long-term growth of the national economy.
V. Anantha Nageswaran is a member of the Economic Advisory Council to the Prime Minister. These are the personal opinions of the author.
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