Wean off the dependence on increased tax collection from diesel and petroleum
As reported by this paper, despite international crude oil prices ruling in a range of $50 to $60, Indian consumers are paying the same prices as they used to pay when crude oil was quoting above $100 in early 2014. The reason, since November 2014, excise duty on diesel has gone up by 400 per cent and petrol by 133 per cent and benefits which should have gone to consumers have been flowing to the government exchequer.
Given the fact that economic recovery has been elusive for a long time, government had been using this route to shore up revenue in order to push up its expenditure. No one can deny that the private sector in India is no position to push economic growth by capital expenditure for two reasons. Firstly, the private sector is highly leveraged and simply cannot afford to borrow more and secondly and there are a number of industries where there is over capacity so there is no reason for companies, even if they are not leveraged to put in fresh capacities and hence they are not spending. In such a scenario, the only option for the government was to give a fillip to its own expenditure and hope that over a period of time, private sector would join in spending. But for giving that fillip to the economy, money had to come from somewhere. This time it is excise duty on petroleum products which has come to the rescue. But is this a route which the government can take for long? We believe that this policy of increasing the excise duty and shoring up revenue can only work up till a point of time and that point has come. It would be better that the government think of an alternative route to raise resources. A contingency plan needs to be worked out now that crude oil prices are relatively low because the practice of raising resources through petroleum sector will come under severe pressure the moment international crude oil prices begin to rise. At that time if our policy mavens decide to pass on increased prices to consumers they would not only risk giving a push to imported inflation, but also they would be putting consumption expenditure of individuals under severe pressure. The end result could be that Indian economy could face the risk of a sudden slowdown. Equally, price increases of petro products have never acted as a deterrent and since economic activity moves on wheels, India continues to be one of the largest energy users — fossil fuels — in the world. If that was to happen, rupee which in the last two years has shown remarkable strength would come under pressure and then vicious circle of weaker currency and slower growth which we saw in 2013 would re-start. There are clear signs that the US economy is on path of recovery, which means that sooner or later China, which is the global manufacturing hub would also be witnessing a pick up. Despite all the noises which the new US administration is making on its policy on trade with China, it would require a decade for America to regain its manufacturing strength. Till that happens, the impact of Us economy on Chinese economic growth would remain high.
The moment the Chinese economy picks up, Chinese import of crude oil will increase and that is the time we might see a sharp rise in crude oil prices. China is already soaking up metals in a big way signalling a commodity upcycle. Another factor that has started to contribute heavily to price movement of any commodity is excess liquidity floating across the global financial market. The moment there is an increase in prices in any asset class, be it gold or commodities, huge money flows chase those assets, which pushes the prices even higher. In case of crude oil, this was clearly visible between 2011 and 2013, despite slow global growth, big sovereign funds invested in crude oil because they were flush with liquidity. It is time our policy makers wean off of their dependence on increased tax collection from diesel and petroleum, otherwise the position of India as an island of growth amongst emerging markets will face sudden risk.