#3 Heads I Win, Tails You Lose
On India's curious deregulation of fuel prices and Client Politics
Fuel tax in India has been rising sharply in the past years. An increase in fuel prices affect a large but unorganized section of society, while the reduction in corporate taxes benefits a small but organized group. The result is a form of client politics, where the corporates get an attractive tax break, while common citizens continue to shoulder the burden of rising taxes in a pandemic.
A curious case of fuel price deregulation in India
Let’s begin from June 2010, when petrol prices were deregulated by UPA2. At the time, the oil companies were bleeding due to the gap between the cost of production and retail prices of petrol and diesel. PM Manmohan Singh said that deregulation of fuel prices was “much needed”. Deregulation meant that the prices of fuel in India would be connected to global crude prices - as global prices rise, prices in India would rise; when global prices fall, prices in India would fall. This was an economically sound move, but what actually happened is rather amusing.
From 2014 to 2017 as global crude prices fell, taxes on fuel were increased, with only a marginal benefit passed to the consumer price. Then, as global crude prices started to rise again, the high taxes remained and consumer prices rose even further. This slow creeping up of tax component has led us to the current situation where taxes make up more than half of the retail price of fuel.
Vivek Kaul explains this in great depth in this article and I am borrowing the diesel price breakdown from his analysis. Kaul writes, “The central government tax on diesel has gone up from Rs. 4.50 per litre in 2014-15 to Rs. 31.80 per litre in 2021. This is the real story.”
It's like the government telling the consumer, “Heads I win, tails you lose”.
Now, there was a time when governments would fall due to high onion prices. High fuel price was an issue in the second term of UPA too. However, the current government has gotten away with such a steep increase on taxes in petrol and diesel without much electoral repercussions.
Fuel Tax = a milch cow
This has obviously emboldened the government. As a rational actor, why should it worry about an issue for which it is not going to be punished. And so, as explained here, central excise duty on fuel has become it’s main source to compensate for the fall in corporate tax and less than expected GST collection.
Lower corporate tax, despite bumper profits
But why has corporate tax collection dropped despite corporate India posting record profits?
Well, in September 2019, the government had reduced the base corporate tax rate from 30% to 22%, and from 25% to 15% for new manufacturing companies. This “historic” tax cut resulted in a reduction of 1.45 lakh crores in annual tax collection. One must remember that corporate tax is applied on the profits earned by the companies, and Indian firms have hit a six-year high in profits amidst pandemic. This is because the unorganized sector has been disproportionately affected by the lockdown and with higher formalization of the economy, bigger players have seen an increased market share.
So, basically the government gave a tax break to a sector that was already doing well and now it has a hole in its pocket. Who pays? Of course, it’s going to come out of the common man’s pockets. This, at a time when unemployment has increased, incomes have declined and there is widespread distress.
So how do we understand this?
Concentrated benefits, diffused cost
Fuel prices are a case of diffused cost on a large, but unorganized group. The tax paid on petrol and diesel is borne by everyone, even those who do not ride in shiny cars. Cost on fuel is added to every item we purchase. It is also a regressive tax because the poor end up paying a higher percentage of their income through such a tax as compared to the rich. A Rs. 500 increase in fuel bill is a 10% increase for someone earning Rs. 5000. While it is only 1% increase for someone earning Rs. 50000. So effectively the poor are taxed more than the rich.
On the other hand, corporate tax cuts benefit the top 0.9% of India Inc (companies with turnover above 400 crore). This is a small but organized group with better access to those in power with all the incentives to lobby for itself. Now, one rationale is that large companies will create jobs and make investments which will then help the economy. The counter to that is, why will companies invest if the demand is suppressed, as is the case now? Governments across the world have, in fact, done cash transfers to its citizens during the pandemic to revive demand. Agreed that India cannot afford to do that, but does it help to burden the citizens even more, when they are still reeling under the effects of the pandemic and the lockdown?
Now, when concentrated benefits and diffused costs come together, we get Client Politics - a small interest group benefitting at the cost of the public. The question is, will the public unite over this issue and act in its own interest or not? For that, we will have to wait and watch.
The Silver Line
Positive stories of change
Last week on this newsletter, we looked at the importance of protecting the Aravallis as water recharge zones. This week, we have a positive story of change that demonstrates that thoughtful design thinking can actually go a long way in helping the environment and making our cities more live-able.
This story is about how the city of Gurgaon solved the issue of flooding on the Golf course road, which had seen major flooding of its underpasses last year. This year, in collaboration with researchers from TERI and NGO IamGurgaon, GMDA built four drainage channels to divert water to natural creeks, which act as water sinks. Although this is still work in progress, there were early signs of success in that this area did not get flooded in the recent rainfall (when many other parts of the city were flooded). This is a small change in a limited area, but an example that we need more thoughtful urban planning and not mindless construction.
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