Hike in diesel prices

Dr Bharat Jhunjhunwala
Increase in price of diesel is certainly a burden on the common man. It is suggested that the Government should reduce the taxes on petroleum products to lessen this burden. It is forgotten, however, that such loss of revenue will have to be made up by increased taxation elsewhere. There is no such thing as a free lunch. If we tax diesel less then we will have to tax some other item more.
According to one estimate the price of petrol sans taxes in India would be Rs 42 per liter. The load of central and state taxes is about Rs 35 leading to the market price of about Rs 77 per liter. The Opposition wants the Government to reduce the prices of petroleum products by lessening the taxes imposed on them; instead of first imposing high taxes and then providing subsidies on diesel.
Parallel argument is that the talk of fiscal deficit increasing because of the burden of petroleum subsidies is false. The total receipts of taxes from petroleum products far exceed the subsidies provided on them. Petroleum is actually a cash cow for the Government; not a ‘fiscal burden’ as made out to be. The Government is collecting taxes of about Rs 35 per liter on diesel and only reimbursing part of this via subsidies.
Both the above arguments are factually correct. However, they do not establish the case for reduction in taxes on petroleum products or for continuation of  subsidies on diesel. The Government will have to impose taxes on some other items in order to make up for the loss of revenues due to reduced taxation. The final result will be that price of petroleum products will decline but that of other products will increase. The consumer will be left in the same dismal position as today.
Central question is what items to tax?  Obviously ‘harmful’ items like cigarettes and liquor are to be taxed heavily; while items of everyday necessary consumption such as cloth, paper and rail travel are to be taxed lightly in order to secure people’s welfare. The key question, then, is whether to treat diesel as a ‘harmful’ product or a ‘necessary’ one?
According to one estimate the consumption of diesel in the country is distributed as follows: Trucks 36 percent, cars 14, bus 12, agriculture 12, industry 10, electricity 8 and rail 8 percent. We may estimate the share of poor- and rich in this consumption in order to assess the social implications of any change in the price regime. I estimate that only 10 percent of the goods transported by trucks are consumed by the poor. Accordingly the share of poor in the 36 percent consumption of diesel by trucks would be 4 percent. We can similarly assess the share of the poor in various components of diesel consumption. In this way I estimate that the poor account for about 25 percent of the total consumption of diesel. Most benefits from subsidies on diesel are, therefore, captured by the rich as seen in the buoyant sales of luxury diesel-fuelled cars.
Indeed, the Government can reduce taxes on petroleum and increase them on other items. However, the taxes will have to be increased on items where consumption by the rich exceeds 75 percent for such a policy to be people-friendly. Such items could be the likes of float glass, luxury cars, shampoo and washing machines. The identification and taxation of such items is, unfortunately, contra Congress’ ideology. The Congress Party wants that the tax regime should be simplified to reduce litigation and jumpstart economic growth. It is proposed to implement the Goods and Services Tax with this objective in mind. Effectively, therefore, the Government will have to abandon the GST in order to reduce taxes on petroleum products and yet remain people-friendly.
I oppose the GST on grounds of it not differentiating between the consumption by the poor and the rich. But the Opposition will have to make its position clear. Either they have to stop demanding rollback of taxes on petroleum or they have to abandon GST. They cannot blow hot and cold together. It would be good if they abandon the GST and then provide an alternate structure of taxes that is people-friendly. The call for rollback of diesel prices is hollow in absence of such alternative approach to taxation.
Another argument against hike in price of diesel is that petroleum prices are already higher in India than those prevailing in most other countries. This argument does not hold because every country has to orient its consumption pattern in accordance with its natural resource endowment. The price of water should be high in Saudi Arabia and that of oil high in India. It is necessary for us to reduce consumption of petroleum to reduce our dependency on imports and to safeguard our economic sovereignty.
Low price of oil encourages people to burn more oil which, in turn, forces the Oil Companies to import yet higher quantities. We sink into the quicksand of ever increasing consumption, increasing imports and increasing losses. Low price of oil makes our economy more energy-intensive. Businessmen use diesel fuel based generators to produce goods. Our economy becomes dependent upon oil. We cannot do without oil in event of a war or a natural catastrophe like tsunami and that will inflict great damage on our economy.
Lower price of oil prevents the development of alternate sources of energy. This writer had an opportunity to study the working of Gobar Gas plants in Village Shyampur near Haridwar some time ago. Till mid-nineties about 50 Gobar Gas plants were in operation successfully for more than twenty years. Then LPG Gas Cylinders became available at low price. Farmers found it easier to cook food with LPG than with Gobar Gas. They were saved the work of having to mix Gobar with water to be fed into the plants, drying the slurry, maintaining the pipe lines and water supply, etc. They closed the Gobar gas plants. This alternate source of energy was dismantled because cheaper LPG became available. The same applies to wind, solar, micro-hydel, thorium and bio sources of energy. Cheap oil distracts our attention from these sources and traps us into imports.
Other measures of reducing consumption should also be considered in addition to increase in price of oil. Many countries have law that requires a car owner to have at least one co-passenger while driving on the highways. You can be fined if you are driving alone. Car owners are thus forced to pay for the services of a dummy passenger who simply sits in the car. This raises the cost of driving own car to the office and makes it economic to use public transport. We need creative solution to deal with the increased consumption of petroleum products.


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