In the past, a relatively lower fuel pump price was managed by asking the upstream oil companies to bear the burden in part, cutting taxes on fuel and deferring subsidy payments to the downstream oil companies (which had to give up their pricing independence).
This impacted government’s fiscal maths and market value of the companies, as it impaired the capital efficiency. The deterioration in the state of the fiscal took several years to repair and had to wait for oil prices to fall.
This strategy did result in some temporary relief for customers, but put stress on the fiscal. If the attempt was to shield the economy from higher input cost of oil, it did not succeed as inflation was high during that period.
Also, there was no direction on the possible resolution process. High fiscal deficit could not continue forever. High fiscal deficit can be corrected only with higher taxes in one form or the other.
Moreover, subsidized price of an imported commodity actually encourages its use and perpetuates the stress on the economy. A higher stress impairs the country’s attractiveness to investors and further deteriorates the overall macros.
In the current period, fuel prices have hovered close to the peak levels that they had hit in the past. This has happened because there has been no tax cuts and marketing companies have continued to have pricing freedom. The big advantage of this policy has been that it has not put any stress on the fiscal. The fact that fuel prices have increased has resulted in demand adjustments.
This has to be encouraged. Stock prices of oil refining and marketing companies have stabilised as the market has realised the government determination to refrain from interfering in pricing.
Tax on fuel is a levy on businesses and individuals. It is equitable. Since businesses would see input price increase, they would pass that on to the buyers of their products. It gets passed on. The taxation on individuals is in line with one’s driving pattern. Since driving pattern would be in line with one’s income, it has to be seen as equitable.
Even if the government absorbs the pain initially, in the end it would have to raise taxes, which would have a similar outcome. A large section of country men do not pay income-tax. In this context, taxes on the fuel are seen to be more equitable and easy to collect instead of adjusting direct taxes.
The government should dampen the effect of any sharp price increase but in the usual case should let market forces decide.
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