Happy new year folks: The govt has increased excise duty on petrol and diesel again!

Jan 4, 2016

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Dear Reader,

While you, me and everybody else was busy celebrating the new year, the government quietly increased the excise duty on petrol and diesel, again. This increase was announced on January 1, 2016 and came into effect from the next day.

This is the seventh increase in the excise duty on petrol and diesel since November 2014. Also, the government has increased the excise duty thrice in quick succession over the last two months (between November 6, 2015 and now). Since November 2014, the excise duty on unbranded petrol has gone up by Rs 6.53 per litre, with latest increase being of 37 paisa per litre. This is a massive jump of 544%.

During the same period the excise duty on unbranded diesel has gone up by Rs 6.37 per litre or 436%, with the latest increase of Rs 2 per litre. In the process, the government has captured a major part of the fall in oil prices.

On November 11, 2014, when the excise duty on petrol and diesel was increased by the Narendra Modi government for the first time, the price of the Indian basket of crude oil was at $79.11 per barrel. As on December 31, 2015, the price of the Indian basket of crude oil stood at $32.9 per barrel, a massive fall of 58.4% since November 2014.


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In the same period the price of petrol and diesel in Mumbai has fallen by only 3.6% and 9.9% respectively. What this tells us loud and clear is that the government has captured most of the fall in oil prices, without passing on the benefit to end consumers. The surprising thing here is that there has been no protest on this, either from the opposition parties or the citizens.

There are a number of issues that crop up here. First comes the question, why is the government doing this? In fact, there is a clear trend in the government increases of the excise duty on petrol and diesel. In 2014-2015, the last financial year, the increases came on November 11, 2014, December 2, 2014 and January 1, 2015. These increases were in the period close to the annual budget which is presented in end February.

The same trend is playing out this time as well. The three recent increases have come on November 6, 2015, December 16, 2015 and January 1, 2016. In the run up to the budget which will be presented in end February 2016, the government is sprucing up its finances. Estimates suggest that the three recent increases will bring in an extra Rs 10,000 crore into the coffers of the government.

In the budget presented in February 2015, the government had targeted a fiscal deficit of Rs 5,55,649 crore or 3.9% of the gross domestic product(GDP). Fiscal deficit is the difference between what a government earns and what it spends.

It is important to figure out how this calculation was carried out. In 2014-2015, the nominal GDP was at Rs 12,653,762 crore. Nominal GDP is essentially GDP which hasn't been adjusted for inflation. It was assumed that during 2015-2016, the nominal GDP would increase by 11.5% to Rs 14,108,945 crore. A fiscal deficit of Rs 5,55,649 crore amounts to 3.9% of this projected GDP of Rs 14,108,945 crore.

So there are two things that the government needs to keep track of here. The absolute fiscal deficit as well as the nominal GDP. The trouble is that the nominal GDP hasn't grown at the projected rate. The nominal GDP for the first six months of the financial year (April to September 2015) has grown by only 8.2% instead of the projected 11.5%. And this has thrown the fiscal deficit calculations of the government for a toss.

As the Mid-Year Economic Analysis released in December 2015 points out: "It is true that the decline in nominal GDP growth relative to the budget assumption will pose a challenge for meeting the fiscal deficit target of 3.9 per cent of GDP. Slower-than-anticipated nominal GDP growth (8.2 percent versus budget estimate of 11.5) will itself raise the deficit target by 0.2 percent of GDP."

In order to ensure that it meets the fiscal deficit target, the government has increased the excise duty on petrol and diesel thrice in the last three months. On November 6, 2015, when the first of the three increases came in, the price of the Indian basket of crude oil was at $45.07 per barrel. Since then it has fallen to $32.9 per b arrel, a fall of 27%. Hence, every time there has been a fall in oil prices, the government has moved in and increased the excise duty.

What this tells us is that on the finance front, the government has essentially turned out to be a one-trick pony. The easy money that the government has managed to raise from falling oil prices has led to a situation where it has totally given up on all other measures to spruce up its revenues as well as cut its expenditure.

The loss making public sector units continue to operate as they had in the past. The government continues to own stakes in companies like ITC, Axis Bank and L&T, worth thousands of crore. The irony is that the government spends a lot of money in telling people that consumption of tobacco is injurious to health and at the same owns a 11.17% stake in ITC through the Specified Undertaking of the Unit Trust of India. How do the finance minister Arun Jaitley and prime minister Narendra Modi explain this dichotomy? (Like P Chidambaram and Manmohan Singh before them).

Jaitley has also talked about a stable tax regime in the past to woo foreign investors to invest in India. How about offering the same stable tax regime to the Indian consumer as well? The Indian economy as well as the government finances have benefitted a lot during the course of this year due to falling oil prices. Sajjid Chinoy, chief economist at JP Morgan India, has estimated that lower oil prices gave a 1.3 percentage points boost to growth in the last four quarters.

The question is will this continue? If it doesn't, does the government have a Plan B in place? What will happen once oil prices start to rise? How will the government finance its expenditure? Will the government be able to maintain the excise duty that it is currently charging on petrol and diesel and allow their respective prices to rise? If the government raised excise duty in an era of falling oil prices, it is only fair that it cuts excise duty when oil prices are going up?

To conclude, falling oil prices have made the Modi government lazy on the revenue raising front. And that is clearly not a good sign as we enter 2016.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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10 Responses to "Happy new year folks: The govt has increased excise duty on petrol and diesel again!"

Gopalan

Jan 6, 2016

Dear Mr Vivek,
I had the oppurtunity to listen to FM Mr Jaitley's reply in the Rajya Sabha in the recently concluded Winter Session when various political parties questioned the Govt's rationale in raising the excise and custom duties on petrol and diesel. One major point he made in reply was that if/when the Govt brought down petrol/diesel prices, the States would raise VAT to fill their coffers! The 2nd point was that as per the recent Finance Commmission recos. which the Central Govt. had accepted, major part of raising of duties went to the States. You shld have seen the faces of the oppn. guys who raised the question. They seemed to have no answer. However as you have rightly said this is leading to great Governmental laxity.
Best Regards,
N Gopalan

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Gururaja

Jan 6, 2016

For all the plunder that upa 1&2 committed resulting in empty govt coffers which were inherited by current NDA regime, the current step is reasonable. Even though it pinches every common man (including me), some bitter pills r required at times. At least NDA is not doing any scams unlike the upa1&2.

Like (1)

Ajay

Jan 5, 2016

The government must keep fiscal deficit under check. But the main point in Vivek's post, I think, is that in doing so the government is adopting a policy of complacence by wrongly relying primarily (and perhaps only) on external favorable factors. While this may work in the short term, when the tide turns on the international oil prices we may find ourselves in dire circumstances unless the government is able to boost the growth and curtail unnecessary expenditure now. And at least at the moment the outlook on that front is not looking very positive as shown by a lot of economic indicators.

The argument that this will control the number of cars on the road is quite amusing.

Like (1)

Rajanikanta Verma

Jan 4, 2016

Clearly the Government has increased taxes on fuel to keep try and keep its deficit close to its announced target. But is this not a good decision?

There are too many cars on the road. There is not sufficient driving or parking space and the pollution has reached intolerable levels. If the lower cost of crude is passed on fully to the motorist it would only encourage more private motoring. Surely this is not in the interest of the public at large.

Government should take steps to discourage people from buying and driving more cars and it is a basic principle of economics that increased price would result in decreased demand.Government not pass on the reduction in price of crude to the consumer at all. We should focus on improving public transport and perhaps find funding for it from increased taxes on petrol. Our aim should be to discourage private motoring.

Like (2)

Prashant Manohar

Jan 4, 2016

Columns written by Bill Boner and Vivek Kaul are named as "Daily Reckoning". Sugget you should have different names for two authors' columns.

Like (2)

vip

Jan 4, 2016

If Govt pass on lower diesel prices to consumers, it can give terrific booster to the domestic economy as well as exports as our cost of production become more competitive. Govt is wasting that best opportunity arises on steep fall of crude oil.

Like (2)

krishnan vc

Jan 4, 2016

Sir,
I have always respected your comments and views; but in this case I feel that you are totally off mark. The government is on track and is doing things very sensibly, at least in this case. Controlling the fiscal deficit is of the highest priority and taking benefit of falling oil prices is the correct step.

Like (1)

Kannan V

Jan 4, 2016

Vivek : Happy New Year and you are one of the few who has spoken about the hike in excise on Fuel nullifying the benefit to the customer due to continuous fall in crude prices. I support this move of the Govt. from the perspective of moderating consumption growth by artificially keeping the fuel prices high. However what I do not support is the lack of transparency being exhibited by the government in this case. Government should come forward and make an open declaration on the excise hike and to use the revenue garnered thus to support/moderate future crude shocks using this windfall gains.

Like (1)

Gaurang Dalal

Jan 4, 2016

Dear Mr. Kaul,

I do appreciate your view that government is shortchanging the consumers by increasing the excite duty on fuel. However, shouldn't we be be also looking at it from the government perspective? If I remember correctly, when the oil prices had gone over Rs.100/- per barrel, the government had considerably reduced customs/excise duty. Plus when the prices and consumption of oil go down, the the total quantum of customs and excise duty on oil also comes down which would be quite substantial as compared to the budgetted figure.
Don't you think, the government needs to compensate for those losses?

Like (1)

Vipul Jasani

Jan 4, 2016

Hi,

This is very small increase in Excise duty. I would strongly recommend to increase the duty atleast by 50%.

Thanks

Like (1)
  
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