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The one-trick pony in Delhi

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As the price of crude oil rises, the government is clueless and floundering. The prognosis, therefore, is crushing taxes, higher prices and greater burden on the average consumer. Curse and bear it

By: P. Chidambaram

The first Gulf War 1990 was fought on oil: which companies will control the oil fields of the Arabian region? Norway wisely built a Future Fund on oil revenues, strict control on its use and fiscal discipline. Latin American economies flourished or perished on their use of oil revenues. Venezuela is broke despite having some of the largest known oil reserves. For many years, Russia made its annual budget assuming that crude oil prices will be USD 100 or above. When oil prices collapsed, the Russian economy also collapsed.

Enjoying the Bonanza

Oil is a critical factor in any economy. India’s dependence on oil imports is 80 per cent. When crude oil prices collapsed in 2014 and brought a windfall, the Central Budget was based on low prices. Low oil prices gave room to the BJP-NDA government and state governments to tax the consumer to the hilt and garner large resources without fuelling inflation. On the expenditure side, the allocation for subsidies on LPG, kerosene and fertilisers could be reduced. The government also saved on expenditure on Railways and in other departments. Altogether, it was a good time for the government: it reaped a windfall without sparing a thought for what it would do when oil prices rose again.

Look at the revenues collected by the Central government and state governments in recent years from taxes on petrol and diesel

(see table).

The flip side was increased dependence on taxes on petroleum and petroleum products. The Central government’s receipts from such taxes as a percentage of total revenue receipts have steadily increased from 15 per cent in 2013-14 to 24 per cent in 2016-17. On the contrary, state governments’ receipts from taxes on the petroleum sector as a percentage of total revenue receipts have moderated from 10 per cent in 2013-14 to 8 per cent in 2016-17.

Tax & Spend Failed

The BJP-NDA government bought the strategy of ‘tax and spend’. Government expenditure increased sharply in the years 2014-15 to 2016-17. It was believed that expenditure-led growth will crowd-in private investments. That did not happen. Despite various slogans — Make in India, Start Up India etc — private investment is not taking place. Gross Fixed Capital Formation (GFCF) has fallen from 31.30 per cent in 2013-14 to 28.49 per cent in 2017-18. Of this, private capital formation has fallen from 24.20 per cent to 21.38 per cent (upto 2016-17). Start Up India is a non-starter. Official data revealed that only 109 out of 6,981 recognised start-up businesses had received government support/funding.

There were alternatives. A bold move to cut taxes on petrol and diesel would have given a big boost to private consumption. A cut in taxes would have led to cost-savings and competitive-pricing for exporters and would have boosted exports. Both would have resulted in benefits to industry: higher capacity utilisation, enhanced productivity and more employment.

Alternative approaches were either not explored or shunned. Why? I can only put it down to the lack of collective thinking and collective decision-making. When one person rides into town on a white horse and claims to have answers to all the problems of the country, and will not listen to advice or brook dissent, the result is what is called a ‘one-trick pony’. Government expenditure-led growth was the Gujarat model. Undeniably, that model has worked in some countries when there was a recession. But, India in May 2014 did not face a recession. According to the government’s own figures, the economy grew by 6.4 per cent in 2013-14. A great opportunity to boost the growth rate was lost.

No Options Left

The experience of the last four years is that the Gujarat model has not worked. At the end of the second year, the government should have shifted gears. It did not. The problem was compounded when the GST was introduced on July 1, 2017. Brushing aside advice, the government stuck to high and multiple rates of the GST, pushing industry — especially MSMEs — into a struggle for survival. The double blow of demonetisation and a flawed GST knocked out the confidence of investors.

The burden of high taxes on petroleum and diesel is borne by the people. They do so silently — what choice do they have? — but not willingly. Ask owners of two-wheelers, cars, taxis, autos, tractors and commercial trucks. Every time they fill the tank, they curse the Central government. When petrol and diesel prices hit an all-time high last week, the voices of protest grew louder. The demand for bringing petroleum and petroleum products under the GST is gaining support.

As the government enters the last year of its term, it has few options. The fiscal space has reduced considerably. It is deeply committed to the ‘tax and spend’ strategy and it will be difficult to unwind that strategy in the final year. As the price of crude oil rises, the government is clueless and floundering. The prognosis, therefore, is crushing taxes, higher prices and greater burden on the average consumer. Curse and bear it.

Courtesy Indian Express

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