Within 48 hours from Thursday, the Modi government, by two moves, spelt out why relief in the form of a one-time excise cut could be a mere short-term fix with long-term negative implications against spiralling fuel prices and inflation. It also slipped under the door a warning that “it was getting better but could get worse”.
It’s part of a damage-control exercise. Over the last fortnight, the broad templates in play in news headlines have been “fuel on fires”, “inflation hurting public”, and “govt faces ire for high prices”.
Generally, the BJP’s mammoth well-oiled machinery runs well when the going is good. But come bad news and it enters an uneasy, reluctance mode. The rehearsed swagger disappears. It turns economical on communication.
The government curtailed the budget session of Parliament and derailed the chances of a full debate on the price rise that was vociferously demanded by the opposition. It would have been a difficult-to-defend situation for the MPs of the BJP and its alliance partners in a debate beamed live across the country.
So, in a now-customary manner, the government that had bad news to convey, activated the indirect avenues.
First came the Ministry of Finance’s monthly Economic Review on Thursday. It warned that “ the present level of international crude prices (should it persist longer) may come in the way of India achieving a real economic growth rate north of 8% in FY-23 and the trends also pose upside risks to inflation and persistence of high prices.
To underline that the Russia-Ukraine conflict is not bad news just for India, the review stated that if sustained, the conflict is expected to negatively impact the world output growth by 1% and accentuate trends, such as global food shortages.
An assurance was thrown in for the public that the government wasn’t just bracing for the worst and had a plan in the form of exploring fuel import diversification, to procure crude at more “affordable prices”.
Next, on Friday, Revenue Secretary Tarun Bajaj briefed the media on a presentation titled “highlights of tax revenue 2021-22”. The revenue secretary and his team went on to highlight that in FY 2021-22 India's gross tax collections rose to mark the post-pandemic recovery to touch Rs 27.07 lakh crore. It went on to state that the growth in tax collection in FY22 was, by tentative estimates, 7.6% higher than the revised estimate of Rs 25.16 lakh crore presented in the 2022 Budget. Compared to FY-21, 33.5% more tax was collected in FY-22, it stated.
Excise duty raked in Rs 3.91 lakh crore for the government and customs contributed Rs 2 lakh crore in FY-22. The excise duty was marginally lower than the revised estimate of Rs 3.94 lakh crore but the customs levy collections exceeded the revised estimate of Rs 1.89 lakh crore, a rise of 41%.
There was good news on the direct tax front in FY-2021-22 as harvest grew by 49% while the indirect tax collection rose by 30%, the revenue secretary said. The direct tax collection of Rs 14.1 lakh crore was Rs 3.02 lakh crore more than the Budget estimate. While personal income tax collection jumped 43% to about Rs 7.49 lakh crore, corporate taxes grew 56.1% to Rs 8.58 lakh crore.
The indirect tax collection, too, was higher than the Budget estimate. Against the Budget estimate of Rs 11.02 lakh crore indirect tax, the mop-up was Rs 12.9 lakh crore, which meant a rise of Rs 1.88 lakh crore.
HIGHEST TAX-TO GDP RATIO IN 23 YEARS
Doling out more good news, Revenue Secretary Tarun Bajaj said, “The tax-to-GDP ratio recorded a healthy jump to 11.7% in FY22 from 10.3% in FY21. This was the highest since 1999.”
The good news continued with Bajaj adding that the overall tax buoyancy showed a ''healthy, robust figure''. The tax buoyancy was reflected by the fact that the increase in tax collection was around twice as fast as the nominal GDP growth rate.
Explaining why the mop-up was gathering volume, Bajaj said: ''A lot of technology is being used where GST figures are now being matched with income tax figures and compliances are being ensured. So, all these resulted in better compliance and better revenues both in direct and indirect taxes and that improved revenues, showing the resilience of the economy.
NOW, THE NOT-SO-GOOD NEWS
Halfway through the briefing, one wondered if the collections were good, why can’t the government foot the bill to provide relief to the public through a cut in the excise on fuel?
It was after the presentation that Bajaj introduced the bad news. He said, “To expect a similar growth (in taxes) next year [FY23] would not be giving you the correct picture. The ministry would get a better picture of the situation in June, once the first instalment of advance tax collections was received.”
He went on to warn that in FY22, the record tax harvest due to rising income tax, corporate taxes, customs and GST took the tax-to-GDP ratio to the highest in 23 years (since 1999) but the indirect tax situation can’t be the same as direct taxes.
He went on to express a sense of caution on excise and customs. He said, “My analysis is that while direct taxes are secular in growth, with indirect taxes, single items can have a major impact. For example, the excise duties brought us a lot of revenue. But we have sacrificed the excise duty. Similar is the case for customs.”
In real terms, the Budget pegged excise mop-up at Rs 3.35 lakh crore and customs duty at Rs 2.13 lakh crore for FY23. And this is where the government is concerned.
Commenting on the Russia-Ukraine war, he said: ''The effect on the economy is worrisome. But that would depend on a number of factors like commodity prices and their effects on the supply chain.”
The Ukraine-Russia conflict is not just impacting crude prices but that of fertilisers, edible oils, metals, and other commodities as well.
Supply disruptions due to the Russia-Ukraine conflict have led to a rise in the international prices of multiple commodities. The international prices of sunflower oil have shot up. Soybean oil prices are going north due to a drought in South America, the major supplier of the commodity.
That’s leading to a rise in demand for palm oil, which has been costing more since the start of the post-Covid recovery.
If the trends continue, the government may have to step in with cuts in import levies to soften the blow for the citizens.
For example, the government had to forego excise revenue from fuels in November last year ahead of Diwali and the crucial polls to five state assemblies. The Centre slashed petrol and diesel prices by Rs 5 and Rs 10, respectively.
Next, in December last year, the government cut the basic customs duty on refined palm oil to 12.5% from 17.5% as part of efforts to increase domestic supplies and bring down the retail prices of the cooking oil.
So, the collection in the last fiscal might have been good but the government’s revenue had already taken a hit and the future is uncertain.
The government is indicating that the avenues for revenue generation have been saturated. The looming uncertainty includes a scenario when existing avenues may earn less.
In a scenario of the Ukraine-Russia conflict lasting longer, the pressure on the government may mount to cut excise duty further for petrol and diesel to ease the burden on consumers.
But it’s a tough choice to make. The slash in excise duty of fuel to drag down prices under Rs 100 per litre in November 2021 is now distant history. Diesel and petrol are back at selling in the range of Rs 90-Rs 122 per litre.
So, in future, there is no guarantee about the longevity of an excise cut. The GST collection has been rising largely due to some strong compliance measures taken by the government only. But there is no credible spike in consumption. In fact, there are fears that the rising fuel prices and inflation may suppress demand further.
That’s exactly why Bajaj in his briefing refused to discuss whether the government could cut the excise duty following the comfortable tax collection last fiscal.
WHY IS THE GOVT HESITANT ON EXCISE CUT?
There are two big reasons why the government is reluctant to provide excise cuts.
One key reason is the revenue for the states. The 15th Finance Commission had recommended that states be given 41% of the divisible tax pool of the Centre during the period from 2021-22 to 2025-26, which is at the same level as was recommended by the 14th Finance Commission.
A drop in excise duty on fuels has negative ramifications for states. The Centre’s charges on petrol and diesel have four components — Basic Excise Duty (BED), Special Additional Excise Duty (SAED), Road, and Infrastructure Cess (RIC) and Agriculture Infrastructure and Development Cess (AIDC). From November 4, the Centre reduced Rs 5 in RIC for petrol to Rs 13 from Rs 18. Similarly, for diesel, it was reduced to Rs 8 from Rs 18. So, the effective Central Excise Duty (including cess) on unbranded petrol is Rs 27.90 and Rs 21.80 on unbranded diesel.
However, there was no reduction in cess charged by the Centre as demanded by the Opposition. The Centre continues to distribute 41% of Rs 12.40 per litre among states for unbranded petrol and Rs 9.8 per litre for diesel from the excise pool and not the cess.
But it also means that a cut in excise may hurt the revenues of the Centre as well as states, which are desperately needed for bread and butter expenses as well as political course correction schemes of the governments.
Recently, at a meeting with the prime minister, senior bureaucrats had raised red flags over the catastrophic impact freebies — a byproduct of competitive populism — are having on the economies of states.
A senior bureaucrat who attended the meeting said, “The issue has been exaggerated in the media by comparing the case of these states with Sri Lanka. It can’t be like Sri Lanka. Simply because states can’t borrow endlessly. There is a central government to regulate that. But there is no denying that schemes involving free components are causing serious stress.”
It’s not just state government and politicians who have zeroed in on freebies as a quick fix to win over the low-income voters.
For example, in January, with only a month away from assembly polls, the Uttar Pradesh government announced a 50% reduction in the tariff of power for agricultural use to directly benefit over 13 lakh farmers in rural and semi-rural areas. The BJP’s campaign in UP included a promise of free electricity for 2.3 crore farm holdings, free scooters for women college-goers, and two free LPG cylinders. The AAP in Punjab vowed 300 units of free power to each of the 55 lakh households and Rs 1,000 monthly allowance for every woman.
Any cut in the Centre’s contribution to states has the potential to derail the political economics of the states ruled by the BJP, its allies, or its Opponents.
The other reason is the Centre’s own expenditure burden. The government says that the revenue collected from petrol and diesel is used in Central schemes, such as Pradhan Mantri Gram Sadak Yojana (PMGSY), Pradhan Mantri Ujjawala Yojana (PMUY), Ayushman Bharat, and Pradhan Mantri Garib Kalyan Yojana (PMGKY). The government has been providing relief to the poor during the pandemic through schemes like Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), under which free ration continues to be provided to 80 crore beneficiaries. In his April 6 address to mark the BJP’s foundation day, Prime Minister Narendra Modi said that Rs 3.5 lakh crore had been spent on this scheme. To provide free vaccination for Covid-19, the Centre’s bill is expected to be around Rs 50,000 crore.
To ensure that the benefits of the welfare schemes reaches the targeted beneficiaries, the Union Government has been implementing the Direct Benefit Transfer (DBT) mechanism since 2013. This mechanism as per the Monthly Economic Review for March, since inception, has transferred funds/benefits valued at Rs 21.7 lakh crore, until March 31, 2022. Presently, 313 schemes are being implemented under the DBT, of which 267 schemes involve cash transfers while 46 are in-kind transfers. The major schemes included under DBT are Public Distribution Scheme (PDS), Fertiliser Subsidy Scheme, PM Awas Yojana, LPG-PAHAL and MGNREGS, among other
The Govt would be forced to curtail its expenditure on flagship welfare schemes, which coincidentally contributed heavily to the BJP’s return to power in four of the five states that voted in March this year.
The endless cycle of elections in India means that governments end up making political course corrections through economic measures. For example, for 137 days, oil companies kept the prices of petrol and diesel frozen at the November 4 (2021) level as five states were heading towards the election.
The central government has its eyes trained on Gujarat and Himachal Pradesh Assembly elections in November-December this year. Stepping back or scaling down on its welfare schemes could be a political disaster. And if crude prices do not go down till then, it could provide relief in fuel prices closer to elections than now.
Everyone wishes that the Ukraine-Russia conflict ends soon to allow economies to chart recovery after two years of the pandemic. The government back home, meanwhile, hopes that its massive capital expenditure plan announced in the Budget sustains the current momentum to a certain extent and the impact on its tax collections is tolerable.
But can there be a relief against high petrol and diesel prices in the near future? The answer is not clear. What’s clearer is that we expect a more political call may be taken than economic. In the meanwhile, one hopes that the current government communicates in a more transparent manner with the public when the going is tough.