Left parties in particular, both during UPA-I and UPA-II, have been demanding rationalisation of taxes on these commodities but the government has never paid any heed to this. In the name of resource mobilisation, the government is increasingly becoming dependent on indirect taxes. Since petroleum products have a relatively inelastic demand, i.e. less affected by change in prices, this forms a stable source of resource mobilisation. It is not by mistake that the Kirit Parikh committee completely overlooks the tax issue even as it talks about the need to deregulate the prices.
There are, however, two issues involved here. First, indirect taxes unlike the direct taxes are, by their very nature, iniquitous. The incidence of indirect taxes falls equally on the consumer whether she is rich or poor. In other words, poor shell out more as a proportion of their income than the rich to pay for these taxes. Also a government whose priority is to give relief to the corporates and the middle classes, there is a continuous pressure to decrease direct taxes. Hence, there is an increased pressure on indirect taxes to fulfil the resource mobilisation targets, a trend consistently visible over the last few union budgets.
Second, notwithstanding the subsidies provided to the poor by the government under different heads, if the indirect tax payments are relatively higher, they stand to lose on the whole. Next we check for this possibility though in an indirect manner because it is difficult to measure taxes and subsidies at the level of different quartiles based on income.
3. Tax Vs Subsidy in the Petroleum Industry
The next question that we ask is whether the government is actually running a deficit vis-a-vis the petroleum sector. A macroeconomic view of the petroleum sector gives us an exactly opposite picture. Surya P. Sethi, former energy adviser to the Planning Commission, estimated the contribution of this sector through taxes to the central as well as the state governments and contrasted it with the total subsidies provided by the government.
He finds that the tax contribution of this sector is way more than the total subsidies. Table 4 presents the data in this regard. He presents the data till 2008-09. To extend the data to 2010-11, a search at the same source as his, remained futile since the Petroleum Planning and Analysis Cell has removed both the historical as well as current data on this.
This table shows that in all the three years from 2006-07, the tax contribution of the petroleum sector is higher than the subsidies provided by the government, inclusive of the so-called under-recoveries. During the year 2010-2011 (data taken from Editorial, Peoples' Democracy, July 03, 2011), the contribution to the central government exchequer from the petroleum sector is reportedly Rs 1,36,000 crore and to the state governments about Rs 80,000 crore. The subsidy provided by the government including the oil bonds issued on the public sector oil marketing companies during the same period is Rs 40,000 crore, ie, 20 per cent of petroleum sector’s contribution in taxes and duties.
It is clear that the petroleum sector is not a drain on the Indian exchequer but let us also address the issue of under-recoveries which becomes the sore point for the government and the media. It is this figure which is often quoted to show that the oil companies are incurring losses due to the governmental regulation. What do these under-recoveries mean? The difference between the cost price and the realized price represents the under-recoveries of the oil marketing companies (OMCs). The realized price is the post-tax price.
There are two problems with this dubious concept. First, if the pre-tax prices are higher than the cost price, there can never be any loss to the exchequer on the whole. Since it is the public sector companies which primarily fund the under-recoveries, this amounts to saying that the government is taking more from the left hand (taxes from these oil companies) and paying less to the right hand (under-recoveries) and yet claiming that it is running huge deficits. Nothing can be more deceitful than this concept of 'under-recoveries'. In accounting terms, these under-recoveries would disappear as soon as the taxes are lowered significantly to an extent that the post-tax prices are higher than the cost price.
Second, these companies, despite under-recoveries, are making enormous profits. The reason for the difference between under-recoveries and profit statement of the OMCs is that the latter takes into account other income streams like dividend income, pipeline income, inventory changes, profits from freely priced products and refining margins in the case of integrated companies. So, quite apart from the first reason, the concept of under-recoveries does not hold much ground especially since they are otherwise making profits.
4. Oil Prices and Inflation
The most recent defence for the price hike has come from Pranab Mukherjee, who says
“Incomplete pass-through of higher crude prices will have an impact on aggregate demand through higher subsidy expenditure, which is expansionary and can add to inflationary pressure. If we increase administered prices of petroleum products and reduce fertilizer subsidy, we allow room for some inflation. If we do not, then the consequent increase in the fiscal deficit will counter the moderating trend in aggregate demand and push inflation high anyhow. In addition, there is also upward pressure on wages. [Domestic investment, saving rates, inflow of foreign capital] post-2008 are gradually regaining their momentum. To some extent, this recovery is being held back by domestic inflation, which seems to have gained a foothold in the past two years” [Business Standard, July 07, 2011. The news report is here]
This is one of the most non-serious argument that I have seen in the recent past coming from this already deranged government. On a serious note, however, the message is clear. The finance minister is trying to kill at least 2 birds, if not more, with the same stone. On the one hand, he signals that this step would be favourable to the international and national finance capital to invest because it would reduce the fiscal deficit as also control inflation. On the other hand, he is favouring the oil companies by moving towards deregulation in other petro-products too.
As is usual with these neo-liberal arguments, there are serious problems here too. First, a higher fiscal deficit or increase in wages do not lead to inflation unless the economy is hitting its near-full capacity. That is the demand-pull inflation does not enter the picture till very late in the day. Mukherjee's view is what the British treasury held which Keynes and Kalecki had so comprehensively refuted. It is ironical that such views are coming into vogue when the orthodox economics is on the backfoot in the wake of the current crisis. But then, why expect Pranab Mukherjee to be conversant with these debates.
Second, as is clear, the current phase is primarily a case of cost-push inflation. In such situations, the government should attempt to curtail indirect taxes, which are an important factor in costs. What the finance minister proposes is actually going to aggravate the problem of inflation and not control it.
Third, there is another implicit argument, which was made explicit by Manish Tiwary, another stalwart of the Congress who epitomizes idiocy on the national television. That is, an increase in prices of diesel, kerosene and LPG would decrease the demand of these products and would control the inflation from the demand side. Quite apart from the points made above, this argument falls flat because the demand of these products is quite inelastic in nature, and hence, only increases the burden on the people.
That this government has lost all sense of proportion is evident from the arguments ranging from ridiculous to the outrageous made by its senior leaders. Embroiled in the wave of corruption, the present dispensation, which has scant regard to the livelihood of millions of poor people, has lost all moral authority to govern this country. However, peoples' protest whether on price rise or corruption would sure show this government its place in the days to come.
Sethi, Surya P. “Analysing the Parikh Committee Report on Pricing of Petroleum Products”, EPW, Vol XLV, No 13, 27 March 2010