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Will politics trump economics on petrol, diesel pricing?
September, 21st 2017

High prices of petrol and diesel are the new political hot potato. Opposition parties are attacking the government for not passing on the benefits of low crude oil prices to consumers. They have a point. Current price of one litre petrol in Delhi is more or less similar to what it was in January 2014. The big difference, however, is that the current Refinery Transfer Price (RTP) is only 60% of what it was during January 2014. RTP is the price component attributable to crude oil prices and exchange rate. Centre’s current excise duty earnings per litre of petrol are more than twice of what they were in January 2014.

The fact is that the Modi government has used the windfall of decline in global oil prices since mid-2014 to raise its tax revenue. The central government has raised the excise duty on petrol and diesel nine times since November 2014. Thus, Centre’s tax revenue from petrol and diesel rose from 0.44% of GDP in 2013-14 to 1.44% of GDP in 2016-17.

Over the same period, the central government’s fiscal deficit went down from 4.5% of GDP to 3.5%. Thus, the entire reduction in fiscal deficit under Modi government can be attributed to increased taxes on petrol and diesel, as was discussed in a previous Plain Facts column. Mint has described this government’s strategy of using low oil-prices to strengthen the fiscal situation as a prudent move.

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