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Millennium Post

Bouncing the ball

The Center has set the fuel fest-ball rolling and we can only hope that there is no further flipside. State VAT needs to be fixed. The problem – states are broke

Bouncing the ball
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I have to rush through the writing of this column, for I have to get up early in the morning. I need to rush to the fuel station, our now most important bunker stop. Sure, it is turning chilly in Delhi, but I have a diesel-run vehicle and it needs basic means and sustenance. Unless the supreme commander decides otherwise yet again, I shall save Rs 600 tomorrow by tanking up my steed and scoot off to the hills. In today's time, Rs 600 is grand indeed.

So what is it that triggers in me belligerence and stokes this tirade? Well, it is the simple fact that the authorities have reduced prices on petrol by Rs 5 a litre and diesel by Rs 10, slashing excise duties as a unique Diwali offering. It is now liquid gold, indeed. Let's not belabour on the fractured numbers, when excise duty on petrol and diesel has touched Rs 31.98 and Rs 32.80 per litre. Let's go back to the past, to 2014, when the excise on petrol was Rs 9.20 and that on diesel per litre was Rs 3.46. Heady days indeed they were… Especially since crude oil then was USD 120 per barrel.

Year 2014 is historical? Sure, I am a dinosaur, but one that has some chilling numbers. Let's hit closer home, focusing on last year, Year 2020. In the last 351 days, through 14 November 2020 and 1 November 2021, the price of domestic gas cylinders has increased by Rs 305. A domestic gas cylinder which was priced at Rs 592 today costs 897.50. Petrol was Rs 81.25 per litre, now it is Rs 106.67. Commercial gas cylinders were Rs 1,157; they are now 1,992. Finally we have diesel, which was Rs 70.67; now it is Rs 98.64.

These are all prices in Meerut on the given dates. Nearby Capital city Delhi follows close behind.

Back to the 'chullah'

The above prices have sent the average Indian home-maker in our villages scurrying into the forests to gather fire-wood, a telling final outcome of the Ujjwala Gas Yojana, where LPG cylinders were given free to rural households and advertised through hoardings at every street-corner, even at our almost-international domestic airports. That said, the 'Diwali gift' from our powers that be is not buying any peace, more so as the world's largest democracy is reaching a state where it is choking on insufferable petrol and diesel prices. Let's not even talk about cooking oil and pulses, tomatoes, potatoes, peas and onions. Cauliflower, anyone? In the nineties, 'kaanda' (onions) brought down a government. Today, the world and its Governments are made of sterner stuff, as are social media and the WhatsApp brigade, or so we believe.

The good news is that we are finally making news now, regardless of its legacy or legitimacy. Our leaders oft-shout from the dais at the onlookers quite shamelessly: 'Oye, safed kapda," one hollers. "Oye, camera idhar kar," he raves again. Onlookers snigger, some bicker… But the result is quite simple – public cackling and a lost cause.

Thus it is that our authorities perk up prices to notch up excise revenues of Rs 4,00,000 crore each year; year on year for a while now, while their spokespersons risk damage to their tonsils by shouting and booing, submitting that they are only summoning up resources enough to cough up the dues that the previous governmental regimes built up through their 'vicious' oil bonds. Oil bonds indeed… A principal payment of Rs 1,30,000 crore cannot be made up through annual excise collections of Rs 4 lakh crore? This is food and fodder for the taking. We have already had a Diwali bonanza of Rs 5 on petrol and Rs 10 on diesel (per litre), both wiped out in the course of a single stroke.

What comes next?

That depends on the states now, doesn't it? The move by the Central Government to reduce excise duties on fuel prices shifts the onus on the states to reduce Value-Added Tax (VAT), the other big determiner of prices of crude-based products. But many are unrelenting, broke as they are, while 22 states and Union Territories have announced cuts in VAT on all motor fuels, providing further relief to customers. But there are 14 Indian states and Union Territories that have not announced any reduction in VAT, as per a statement by the Ministry of Petroleum. Here are the states that are being recalcitrant –Maharashtra, the National Capital Territory of Delhi, West Bengal, Tamil Nadu, Telangana, Andhra Pradesh, Kerala, Meghalaya, Andaman and Nicobar, Jharkhand, Odisha, Chhattisgarh, Punjab and Rajasthan.

Why? Well, it is because they are financially broke, literally.

It is in this context that the Reserve Bank of India's (RBI) annual publication 'State Finances: A study of budgets of 2020-21' comes into play, taking stock of the sustainability of the financial status of India's states. The study flags three vulnerabilities in State finances that policymakers have been asked to take note of. One, it predicts that the hard-won process of fiscal consolidation that had States projecting a combined Gross Fiscal Deficit (GFD) of 2.8 per cent of the Gross Domestic Product (GDP) is well en route to suffer a setback this year, with the GFD quite likely to top 4 per cent. This is the outcome of the 'scissor effect' that has seen State tax collections take severe hits from the COVID-19 lockdowns, even as their fire-fighting responses have escalated unplanned expenses. To juggle cash flows, States have used stopgap fixes such as fuel duty hikes and deferred salaries, which are unsustainable.

Borrowings at a high

When boxed into a tight corner, States have no option but to slam the brakes on capital expenditure. This eventually poses a grave risk to incipient economic recovery, as States end up working at cross-purposes to the Centre's stimulus efforts. Further, State governments are banking on funding 90 per cent of their budget gaps in FY 2021 through market borrowings, compared to less than 50 per cent in FY 2017.

This, according to the RBI, can escalate both their borrowing costs and deficits in the coming years, especially as the pandemic is expected to last for a while still. With the Rs 7-lakh-crore market borrowings of India's States almost matching that of the Central Government, policymakers are worried about these borrowings crowding out the private sector, hampering revival. A related risk lies in the high State debt-to-GDP ratio, estimated at 75 per cent in FY 2021. This then also be further exacerbated by the invocation of State government guarantees on measures such as the Rs 90,000-crore discom rescue package. The situation is dire and calls for structural corrections to the issue of loss-making discoms, rather than temporary packages like a hefty liquidity infusion. The large number of working class that migrated through the first wave of the pandemic also makes states that are MSME-dependent, such as Tamil Nadu, Maharashtra and Gujarat, particularly vulnerable to the loss of productivity and output, delaying economic revival and threatening Corporates which have manufacturing plants here, thus dependent on the availability of a labour force.

Thus, with State finances in a mess, they would be hard-pushed to lower VAT on fuel products, one of the few sources of recurrent income in these depleted times.

So what comes next?

It is a fuzzy picture and one can't really expect any real clarity in the foreseeable future. While the authorities have provided this Diwali gift, there has not been any policy announcement on free market pricing of petroleum products. This leaves the path wide open for oil marketing companies to keep increasing prices in tandem with international movement in the price of crude imports. And what that means, given the trends over the last few months, is that this Rs 5 and Rs 10 on every litre of petrol and diesel, respectively, could be wiped out in the matter of a few weeks, and then the upward spiral will continue.

Perhaps the only way to provide long-term relief to consumers and bring runaway food inflation under control is to bring fuel products under the ambit of the Goods and Services Tax (GST), but that's easier said than done. A recent GST Council meeting discussed the possibility of bringing petroleum products under the ambit of the indirect tax regime, with Union Finance Minister Nirmala Sitharaman announcing that the Center remains open to such a move.

Such a move would significantly reduce the price of petroleum products, but both the Center and the states stand to lose a huge portion of their revenues from excise and tax collections. For instance, Kerala alone will see revenues sliding by Rs 8,000 crore annually if GST is introduced in the petro-products space. And thus, most states remain opposed to the introduction of GST. It is a Catch-22 situation, with near-bankrupt states strongly opposed to the idea. And while the debate continues, consumers will continue to be tossed around like a shuttle-cock from one side of the net to the other, paying through their nose to fill up their fuel tanks, and then riding to shops to buy foodstuffs at greatly increased prices. The final monkey wrench in the works is that the debacle is not going to be resolved anytime soon.

The writer is a communications consultant and a clinical analyst. narayanrajeev2006@gmail.com Views expressed are personal

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