Fuel prices in India are on Fire! And have been so since the beginning of August. Petrol price has risen by Rs 3.65 a litre and diesel by Rs 4.06 per litre. A government official recently said that cut in taxes on petrol and diesel cant be done, as the government doesn’t have the capacity to stomach the revenue losses. Why? Well because the Indian economy is literally in doldrums. The deficits are running high, productivity is low and tax revenues haven’t gone up - owing much to the disasters of demonetisation and GST.
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Creating a self-made deadly spiral, the government official said that it cannot cut the excise duty on fuel prices as cutting excise duty would mean widening the current account deficit (CAD), which in turn would lead to further weakening of the Rupee. With built-up pressures on a currency which is already in crisis, this would mean a push-back in government spending’s i.e. cuts on development schemes.
As per estimates, a one rupee per litre cut would lead to revenues losses of Rs 30,000 crore on an annualised basis for the government. Now, usually such a situation is balanced off by generating more non-oil tax revenues, but thanks to the Gabbar Singh Tax, tax receipts are abysmally low.
In an election year, Narendra Modi and the BJP just cannot afford to see any budgetary cuts in development schemes - for excise duty cuts would mean a high CAD, a high CAD would mean a weaker Rupee, a weaker rupee would mean budgetary cuts on development schemes and cuts on social welfare promises would mean less votes.
Caught between the devil and the deep see, this is the spurious spiral that the BJP finds itself in.