The Government of India, late last week, announced that it was reducing the Special Additional Excise Duty (SAED) on petrol and diesel by Rs10 per litre each, effectively bringing the duty on diesel to zero and on petrol to Rs 3 per litre. The move was brought about to bring relief to state-owned oil companies, which have collectively kept pump prices the same despite a nearly 50% increase in international crude oil prices over the past month. The government of India said the move was aimed at ensuring pump prices remain the same so that the common man is not affected and that they were taking a hit of Rs 7,000 crore every two weeks on account of withdrawing the excise duty.
What the government has stopped short of saying, however, is that these duties were introduced specifically in 2020 at the time the world, including India, was riddled with lockdowns and global crude oil prices collapsed to multi-year lows. Back then, the government specifically introduced these “special additional excise duties” over and above the central excise duty in order that the price at the pump remains the same and does not fall in tandem with international crude oil prices, and the government could use the additional revenue to shore up its finances. That party is now over, and that windfall is no longer accessible to the government.
Instead, the government has been selling a story that, while other countries are facing shortages and prices have gone up significantly, it is acting in the interest of the average citizen to ensure that India is cushioned from the worst impacts of the global price rise. A closer examination of these claims will reveal that the government isn’t exactly as benevolent as it’s aiming to appear. Keeping fuel prices low might bring a hit to the government coffers, but it’s a hit that was expected to go away sooner or later.
Introduced during Covid, the special additional excise duty was never meant to be a long-term measure. Instead, the government exploited it for five long years. At the same time, by keeping pump prices stable, the government has ensured that the knock-on effects of inflation on the overall economy are somewhat muted.
The Centre can’t escape the fact that the Indian economy has been struggling for growth for a while now. Demand-side constraints, along with a K-shaped recovery, have meant that despite investments in capacity, there isn’t enough demand for corporate India to justify fresh investments in the country. A hike in fuel prices would mean there would be even more pressure on people’s wallets, thereby further reducing the common man’s spending power, effectively bringing the economy to a point of stagnation. Not acting to keep fuel prices stable would have resulted in an even bigger hit on the economy and, thereafter, the state's finances.
The only way for the government to sustain things the way they are is to take a temporary revenue hit in the hope that people continue to spend the way they used to and help keep the economy running, if not growing. Despite it all, the government’s failure to prepare for this day is coming to cost India. Manufacturing has slowed on account of the shortage of fuels and industrial raw materials, a sense of fear and lack of trust in the government has taken hold, and uncertainty looms over the land.
Instead of reassuring the public to calm sentiment, the government has shown itself to be a complete non-starter when it comes to having its voice heard on international matters. A shameful fall from a rising superpower that India once aspired to be.
