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A cess for India

Falling crude prices offer an opportunity: for a fixed levy to help finance infrastructure projects

There is now near unanimity that improved “sentiment” after the Narendra Modi-led government took charge at the Centre is yet to translate into concrete investments on the ground. This is borne out by official data on gross fixed capital formation and capital goods production — growth in these is either flat or negative. Also, private corporates, including those with sufficient cash reserves, still seem reluctant to put money into greenfield projects. Whatever the reasons, the fact is they aren’t investing. That leaves the government: Shouldn’t it take up the slack when no one’s investing? But then, where’s the money and what happens to the fiscal deficit?

In this context, one potential source — provided it is exploited judiciously and transparently — could be falling international crude prices. Since this government’s formation on May 26, petrol prices in Delhi have come down by around Rs 8 per litre or 11.3 per cent, while amounting to Rs 4.2 (7.4 per cent) for diesel. The fact that the cost of crude imported by Indian refineries has declined even more — by over 42 per cent — only shows the potential for further price cuts. India consumes around 8 crore kilo-litres of diesel and 2.5 crore kilo-litres of petrol annually. What if the government, instead of allowing retail prices to fall freely, imposes a tax? A mere Re 1 per litre levy on both fuels can raise Rs 10,500 crore a year. If current trends in global oil prices hold, the scope to mop up much more (say, Rs 50,000 crore) to finance public investments in a non-inflationary manner without widening fiscal deficits is obvious.

But hasn’t the government done just that by hiking the excise duty on petrol and diesel by Rs 3.75 and Rs 2.50 a litre in two rounds? The answer is no, because the revenues from these go to the Consolidated Fund of India, which bankrolls everything from salaries and pensions to subsidies and some capital expenditures. A superior option is a cess. The entire proceeds from both the recent excise imposts and future special levies on petrol/diesel should be parked in a separate reserve fund in the Public Account of India. These monies — similar to the fuel cess for the Central Roads Fund created by the last NDA government — must exclusively be used for financing railways, road and other infrastructure projects. Consumers, too, won’t mind paying a levy that will go towards improving transport infrastructure, unlike a general tax on whose use they have no say. Also, this levy should be for a defined period and not an open-ended one like the education cess.

First uploaded on: 15-12-2014 at 01:21 IST
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