What is responsible for this crippling hike? And what can be done about it? So far as the first question goes, there are multiple reasons. Which one is chosen to be foregrounded depends usually on what position one takes in what has become a political and partisan debate. There is no denying that the recent spurt is a result of the rise in global crude, which has begun more or less steadily rising again after extraordinary lows during the lockdown. The roll-out of the vaccines and the attendant easing of lockdowns has resulted in growing global demand. What this means, and very worryingly for India, which imports over 80 per cent of its crude oil, is a strong likelihood of prices hardening further.
But in India, the spike in international prices do not expose the full truth about the increasing cost of fuel, irrespective of the seemingly helpless and nakedly hypocritical positions staked out by Central government ministers. Under the so-called dynamic pricing system, fuel prices are revised every morning based on the oil rates that prevail in the international market. Theoretically, this should provide great relief to people – traders, middle-class consumers etc – in times when the cost of crude drops sharply. But when coinciding with the outbreak of COVID-19, the price hit historic lows in March 2020, the Narendra Modi government responded by hiking excise duties, making something of a mockery of the dynamic pricing system and failing to pass on the benefit to consumers.
As things stand, Central and State taxes make up 60 per cent or more in cost of fuel. This results in the usual blame game, with both accusing the other of cheating the people and causing an inflationary spiral even as they both have their hands in the till. The Centre’s argument, trotted out recently by Finance Minister Nirmala Sitharaman, is that even if the Central share is greater, it must be kept in mind that 40 per cent of this goes towards the States. At the end of the day, both Centre and State governments are to blame for this state of affairs.
States going to the polls have made small reductions in VAT levies in the hope that there will be an electoral payoff. But this is nothing but tokenism and the question about what we can do about high fuel prices remains. What is required in the long run is a reduced dependency on excise duty and VAT as a source of revenue. In the short term, with governments struggling to mend their ailing economies, it is difficult to see any relief on this front. But there is only so far one can go in extracting more revenue from a fuel sector that is already overburdened by taxation. Any durable solution will have to, apart from reducing oil dependency, include a robust strategy to increase revenue by enforcing greater compliance in the collection of direct taxes and GST revenues.