India Markets closed

Spare the common man, Mr Jaitley!

Subhash Chandra & Suryakiran Tiwari

While lower crude prices have brought cheer to analysts who track India’s growth story, the end consumer is not gaining by much. India imports over 80% of its crude requirements as it lacks oil resources. India’s import bill has declined from $12.5 billion in Oct 2014 to $6.8 billion in Oct 2015 due to lower prices.

However, the benefits of this decline in crude prices have not been fully passed on to the end consumer causing much resentment.

Consumers are being taken for a ride

Some facts since Mr Modi took oath as PM on May 26, 2014:

  • Crude oil price has declined from $105.01/bbl to $33.16/bbl (-68%).
  • Rupee has depreciated from Rs 58.2 to a dollar to $66.6 levels (+14%).
  • Price of petrol has declined from Rs 71.4/litre to Rs 59.4/litre only (-17%)

What’s happening here? Everything remaining the same and including the impact of rupee depreciation, price of petrol should have been Rs 26-27/litre as price of importing one barrel of oil has reduced from Rs 6,117 in May 2014 to Rs 2,208 now (-64%).

However, petrol prices in Delhi, for example, have fallen by only 17%. This is because excise duty has increased from Rs 9.5/litre to Rs 19.7/litre and negated the impact of decline in prices to a large extent.

If excise duties had stayed at the same levels, the price of petrol in Delhi would have been Rs 46.5/litre (35% lower than last year, double of 17% currently). **These additional excise duties have generated an additional Rs 60,000 crore until October 2015. That is Rs 60,000 crore transferred from consumer’s pocket to the government’s pocket

Since the Modi government came to power, it has hiked excise duty on petrol seven times, four times in FY15 and three times this year in FY16. Such a high excise duty is generally on products whose consumption the government wants to discourage like tobacco and liquor.

Excise duty on cigarettes (depends upon the size) say for premium classic refined (20 pack) is 75% and on liquor is 150%+. On petrol, the excise duty currently is a whopping 71% (including dealer commission).

Does the government want to discourage people from buying petrol? Is it levying a green tax on people? If so, it must say so clearly and make heavy investments in public transport. That doesn’t seem to be the case though.

It’s purely a result of compensating for lower revenues from other sources.

A precarious situation has been reached now wherein excise duty and VAT are currently 124% of petrol price charged to dealers. Price of petrol is highest in India among BRICS countries. It is higher than even countries like Pakistan.

Prices of petrol/diesel are fixed on a fortnightly basis and since the beginning of this year crude has fallen further by $2/bbl, so we should expect a further rate cut.

However, this may be compensated by further hike in excise which could increase the taxes (excise + VAT) percentage to 130%+ levels of actual price.

The gap between the average yearly-deemed price of petrol in Delhi (assuming no taxes/duties but after taking into account rupee depreciation) and actual price has been increasing over the years from Rs 20.2/litre in 2002 to Rs 34.5/litre in 2015.

The multiple of actual price to deemed price that was 1.9x on an average during the past decade rose to 2.3x in 2015.  

Excise is lazy and easy money

Central budget is essentially an interplay of receipts (taxes, duties, dividends, etc) and expenditure (defense, subsidies, interest, etc). Receipts less expenditure is the deficit that needs to be financed by borrowings. The government is expected to fall short of its tax collection targets primarily because of low profits of corporates as well as missing disinvestment targets. 

Till October 2015 (in the first seven months of the year), tax collections received were only 46.6% of the budget estimates instead of the required run rate of 58%. Non-tax revenue collections were higher than the run rate required at 73% making up for some of the tax losses.

Total expenditure remained on course at 57.5% vs 58.3% budgeted, leading to a higher fiscal deficit than projected.

Till October 2015, we had already achieved 74% of our fiscal deficit targets for the full year.

In our households if income reduces for whatever reason (job-loss, etc),  the immediate reaction would be to curb our expenditure.

In case of a gloomy economic situation, Finance Minister Arun Jaitley should have anticipated such a shortfall and instead of kneejerk reactions and easy solutions should have taken some tough measures, including reducing expenditure as well as finding other ways to increase revenue. 

Export trouble: It wasn’t as if everything happened so quickly that we couldn’t anticipate this earlier. Crude prices have been falling for quite some time now and oil exports tha tform 22% of our total exports were bound to reduce (here no jugglery of increasing export duties like excise would have worked).

Our oil exports have declined from $5.7b in Oct. 2014 to $2.5b in Oct. 2015. Our non-oil exports have steadily declined as well from $20.b to $18.9b during the same period despite a 10% rupee depreciation.

The response should have been to work industry and make structural changes to make exports competitive. In fact,  exports had already begun to decline by Feb 15 and this should have been factored in budgeted tax collections unless Mr Jaitley  believed rupee depreciation would compensate the same.

Disinvestment issues: The disinvestment target of Rs 69,500 crore is also unlikely to be met (only 18.4% run rate till Oct. 2015). This has been blamed on lower commodity prices, while true, the down-cycle had already started by the time the budget was finalized and target was aggressive from day one.

Nominal GDP issues: Aggressive revenue estimates were made despite global slowdown and declining commodity prices and fiscal deficit pegged at 3.9% of GDP to keep rating agencies happy. As Vivek Kaul pointed out in this article http://swarajyamag.com/economy/the-government-has-increased-excise-duty-on-petrol-and-diesel-again/, fiscal deficit was calculated assuming a nominal growth of 11.5%, instead it seems to have grown at about 8.5% lowering the GDP base on which the deficit is to be calculation. 

With exports and profits of corporates down, together with sure to be missed disinvestment target and with no visible intention to reduce expenditure, the only way is to burden the common man through so called indirect taxes. The three hikes of duties on petrol and diesel were made after Oct. 2015 

Rob Peter to pay Paul

Corporate debt is one of the biggest reasons for the struggling economy. Companies would have fewer struggles if their revenues were growing at a faster pace enabling them to generate more profits and pay out their debt comfortably.

Now, the only way the entire corporate sector can do well is if consumption goes up. In the first half of 2015-16, Private consumption was up 9.1% (vs 13.5% previous year) while government consumption was up only 5.6% (vs 12.3% previous year).

The government’s gains through excise plus large transfers to the state governments has not led to a massive jump in government consumption and instead squeezed consumption growth.

Had the low fuel prices been transferred to consumers instead, personal consumption growth would have been much higher thereby enabling corporate growth and profitability thereby energizing the economy.

This, in turn, would have delivered higher direct taxes for the government and created momentum for further growth.

Could this have been averted?

1. Increasing the tax base

Jaitley could do well to devise ways and means to raise the tax collections by increasing the tax net, bringing in more people to pay income tax.

  • Only 3.5 crore people in India (less than 3% of population) pay income tax. Out of this 89% taxpayers are between the tax slabs of Rs 0-5 lakh.
  • Bulk of the income tax comes from people who exceed Rs 10-lakh income bracket.
  • Only 4 lakh people show a taxable income of >Rs 20 lakh.
  • Only 42,800 people have taxable income of >Rs 1 crore

Compare this to following information:

India has 1.98 lakh dollar millionaires (11th highest in the world) according to the World Wealth Report 2015, released by Capgemini and RBC Wealth Management.

Recently 57.5 lakh people gave up LPG subsidy, but there are only 18 lakh people who show taxable income of more than Rs 10 lakh per annum.  

2.  Disinvestment in PSUs

The second source could have been the PSUs. The UPA government had a half-baked disinvestment policy that essentially meant that money was often paid by LIC to acquire stake in PSU companies.

The reason that the general public and investors were never excited by such disinvestments is because the government of the day never had a plan to ensure that the company operated with a high level of efficiency and productivity and without the interference of the government bureaucrats.

The Modi government is following in the same footsteps with no ambitious plans or creative ways to reduce government interference in PSUs.

The ambitious Indrandhanush plan was announced months ago but has no made progress when compared with the Uday project announced by the Power ministry.

The impact of disinvesment can be massive -The top 10 PSUs in the CNX PSU Index have a market capitalization of Rs 10.3 lakh crore. Bringing down the Govt stake in these companies to 52% would have yielded about Rs 1.5 lakh crore.

Further, the government is sitting on large unlisted companies like LIC, GIC, BSNL, ONGC Videsh, HAL etc. The scale of money that the government can generate from these companies is quite significant. However, disinvestment will not be successful if it retains the same management architecture.

The lack of creative ideas on how the government can retain controlling interest and yet enable a high degree of freedom for these companies to function effectively and profitably is the heart of the PSU disinvestment solution.

To sum up, a lot of hard work and difficult decisions on multiple fronts would have helped Jaitley boost revenues and drive consumption at the same time.

Instead, he has chosen the easy path of burdening the common man with more indirect taxes and in turn squeezing the pace of growth in the country.