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‘Big Ticket’ Reforms and Bigger Deceptions: Shankar Gopalakrishnan

September 17, 2012


When the country’s rulers have to tell barefaced lies to get their policies through, you know that there’s something wrong. Consider the recent “big-ticket reforms,” of which the two biggest (in terms of direct impact) have been the diesel price hike and the opening of the retail sector to FDI. The diesel hike, we’re told, was a “tough decision” necessary to “prune subsidies.” Except that diesel isn’t subsidised in this country. To repeat: there is no subsidy on diesel in India. As for FDI in retail, the Cabinet statement on the policy cites four justifications, accompanied by a “Studies show…” claim. Except that the data in the government’s sole study on the issue does not support three of these four justifications. As for their much touted “safeguards”, at least one has been said to be illegal by the Commerce Ministry itself, while the very same CCEA meeting diluted a similar safeguard for single brand retailers.

Whatever one may think about economic policy, the fundamental question is: why does this happen? What does this overt mendacity tell us about the character of the policies these people are pushing?

On diesel, first. According to the Merriam-Webster dictionary, a subsidy is “a grant or gift of money”. Wikipedia calls it an assistance paid to a business or economic sector.” But the government does not grant anyone money for diesel – diesel, and all petrol products, are net revenue earners for the government. As argued in detail in the excellent article “The Great Fuel Subsidy Hoax” by CP Chandrasekhar and Jayati Ghosh, “the petroleum sector is not a burden on the government, but rather a cash cow that yields large revenues in the form of customs duties and excise duties.” The so-called “subsidy” is an accounting trick whereby a certain proportion of government revenue (including that from diesel / petrol, remember) is transferred back to the oil companies. This juggling of the books appears in the Budget as a “subsidy.” But the end result is that people in India still pay well above the “international market price” of petrol – even as it is claimed that rising international prices require price hikes. The real question then is not how much to subsidise diesel and petrol but how much to tax them. The current move is an increase in the effective tax on diesel. Why then don’t we have a debate on how much to tax diesel and petrol in this country? Why is everyone from Montek to the financial press turning the question upside down? We’ll come back to this below.

Next, FDI in retail. The government’s sole study on FDI in retail – done by ICRIER in 2007 – was remarkably shallow, narrow and biased (see “FDI in Retail: What Does the Government’s Own Data Say?” for a critique of this study). But even the data that it found does not support the claims of the government. Statements that current smaller retailers can compete with corporate ones ignore the fact that the survey showed a sharp decline in turnover and profits for small retailers near corporate outlets, with a majority reporting that the reason for the decline was the opening of the corporate retailer (ICRIER went on to claim that this “diminishes over time”, but the logic for this claim is both circular and invalid). The government says “farmers” will benefit; even ICRIER’s highly limited sample of very well off farmers in Karnataka found that only the wealthiest among them were able to sell to corporate retailers. Moreover, ICRIER itself said that safeguards and strengthening of the mandi system are required alongside this – measures that the government has not said a word about. As for “global experience” showing that small retailers are not harmed, chapter 3 of the ICRIER study itself mentions several cases of severe damage to small retailers from FDI (while ignoring many other examples; see “Indian Government’s Claims About Corporate Retail and the Reality” for more details). Regarding employment, the ICRIER study comes up with a figure which is one fifth that cited by Anand Sharma, and neither has any source for their figures; nor does either account for employment that will be lost as a result of FDI. It’s a bit like calculating your monthly accounts by only looking at your income and ignoring your expenses.

As for local sourcing and stopping imports, in August 2011 the very same Commerce Department had said that local sourcing cannot be mandated as any such requirements would violate the WTO’s Trade Related Investment Measures agreement. In short, the policy amounts to doing something now in the secure knowledge that it will later be overturned by some other body – allowing the government (and the retailers) to have their cake and eat it too. Meanwhile, in the very same Cabinet meeting, the requirement for local sourcing for single brand foreign retailers was diluted to make it only applicable “where it is feasible”.

Finally, there’s the small matter that Commerce Minister Anand Sharma lied to the media on Thursday about whether the Cabinet would consider FDI in retail at all.

This brings us back to the same question: why twist facts like this? Why should one engage in such blatantly and shamelessly anti-democratic behaviour? The reason is obvious: the only point about which the government is clear is that these measures are being taken to appease “investor sentiment.” The fact that this country’s economic policies are driven by a small handful of powerful financiers is not anything new. But it should put paid to any delusions that foreign retailers or oil price speculators will be “regulated” and their avarice controlled by “safeguards”; after all, when the main reason for a policy to be made is to boost their profits, why would they then have their gains curbed by the very same government?

The best evidence of this, of course, is what has happened with our tax system. In particular, consider the General Anti Avoidance Rules, the taxation of companies based in Mauritius, and the pursuit of those who used tax havens to escape taxation (the best example being Vodafone). Earlier this year our former Finance Minister was supposedly “not able to sleep” over the fiscal deficit; now, all of these measures – any one of which would have yielded more revenue than the entire amount paid to OMCs for diesel – have been shelved. Nor is there any reference to a windfall tax on the captive coal blocks, the most minimal measure required to even begin to address the scam. The reason all this is ignored? Once again, “investor sentiment”, the same sentiment that ostensibly was concerned about the fiscal deficit. Or is it? Clearly not.

Thus it emerges that the point was never the fiscal deficit or benefiting “farmers” and “consumers”. The point is increasing profits for speculators and finance capitalists. And our government will do everything, including ignoring the facts, to do that.

27 Comments leave one →
  1. September 17, 2012 8:42 PM

    Both the steps pilloried by the autrhor are really good in the long term for the common man. The common man has two main problems. The first one refers to dealing with the lowest level of the govt. and the second one is the large number of middle men who milk him. The first has to be paid bribes and waste time in the number of trips to the govt. office to get a simple thing done. The second inflates prices of all goods and services. While the first one is being skirted by giving excessive importance to wholesale corruption by the who’s who as compared to the retail corruption by the govt’s first line of interface with the common man, the second one is opposed by all and sundry due to vote bank politics, this time by the opposition. Those who oppose the govt. for suppressing open expression of views counter to the govt. themselves do the same thing when views contrary to to their own are expressed. My views are , many times not printed by the Kafila people. Diesel price hike is an improvement in pricing of energy the use of which is required to be restricted. The leftists seem to want the aam aadmi to go to the lowest nadir so that they can then come to power. We have had the taste of what socialism of the watered down variety from which we were rescued by the 1991 economic reforms. What hell would descend upon us if communism of the radical type takes us and our lives over ? We will have to suffer and will not be allowed to even whimper about it. It took over 60 years for the USSR to come out of that morass. Should we go through that hell ?

    • ShankarG permalink
      September 17, 2012 10:11 PM

      This article is not about communism or the lack thereof, so I’ll not respond to that. The issue here is not which policies are desirable but why the government feels the need to twist facts, to the point of lying, in order to justify policies that it wants to get through. I’m afraid that is itself a sign of corruption of the democratic process, is it not?

      • September 20, 2012 8:56 PM

        Governments, at times have to give reasons which are acceptable rather than the real ones. It is for the discerning to appreciate them.

    • rishi permalink
      September 18, 2012 2:16 AM

      Ramesh. While no one (not me at least) is condoning petty corruption, the volume of petty vs big-ticket corruption are non-comparable. A single 2G or Coal-mine scam is many times the size of government’s spending on MGNREGA, for example.

      While putting tax on fuel in order to reduce its consumption (as proposed by, Stiglitz, among others) is a good idea, such a shift in tax-policy would mean corresponding reduction of some other tax (say income tax). This is clearly not the case in current scenario.

      You say that ‘It took over 60 years for the USSR to come out of that morass’. The communism practised in USSR was far from ideal, but even with that system USSR progressed very rapidly economically. It went from being a third-world agricultural economy to a first-world industrial superpower in a matter of a few decades. It, however, quickly lost on health/education/lifespan etc., as soon as the crony capitalism was re-introduced there.

      In India, we are mirroring Russia very closely in terms of economic (disinvestment of PSUs, selling of natural resources for pittance) and political (personality cult, suppressing grass-root movements) policies.

      • September 22, 2012 1:30 PM

        I was in the USSR during 1960-61. I saw the dawn of a thaw under Khruschev. The Russians are a hard working lot. It is the mettle of the people that determines more than the leaders. When prosperity came, urge for freedom increased. I saw the young chafing under a myriad restrictions. When free enterprise starts following restrictions, a beginning is made with crony capitalism. It happened there and is happening here also. Free enterprise system takes care of the crony capitalism and induces competition despite vested interests’ machinations, one of them being to muzzle the voice of non-conformists on security and other pretexts. As far as large scale corruption (scams) vs. retail corruption is concerned, the former does not affect the society as much as the retail corruption even though amounts involved are small.since it spawns more rules, more restrictions, more government staff and most importantly more anti-productivity measures. Just remember pre-1991 days compared to today. If you are interested, you may like to go to my blog and read the relevant article where I have elaborated on the issue.

  2. suresh permalink
    September 17, 2012 9:16 PM

    But the end result is that people in India still pay well above the “international market price” of petrol – even as it is claimed that rising international prices require price hikes.

    This is true if you buy petroleum or diesel directly from a petrol pump. But most people do not consume petrol or diesel that way, rather they use it indirectly. Indirect use happens when people travel, for instance, by train or bus. Some of it happens when people use electricity. (Remember that electricity is generated partly that way.) And so on and so forth. Since part of the government revenues are used to subsidise our public sector transport and electricity prices are still controlled in many cases, it does mean that effectively we are subsidising people’s purchases of diesel or petroleum. From economists who are as high-profile as Messers Ghosh and Chandrasekhar, the analysis is disappointingly sloppy because they simply compare the retail price of diesel and petroleum and completely ignores the vast indirect use.

    I agree that figuring out the exact amount of the subsidy is not easy precisely because of such considerations and also the very complex tax system that we have in place even now. But I don’t think one can simply assert that there is no subsidy at all.

    We have had prior exchanges before and I am confident you won’t agree with me at all. So this is all I’ll say. To the moderator: thanks in case you choose to publish this comment.

  3. ShankarG permalink
    September 17, 2012 10:09 PM

    “Since part of the government revenues are used to subsidise our public sector transport and electricity prices are still controlled in many cases, it does mean that effectively we are subsidising people’s purchases of diesel or petroleum.” I am not sure what you are trying to argue here, since this is not the issue of contest. No one, neither the government nor Ghosh and Chandrasekhar nor me, is talking about subsidies on electricity prices or on public transport. The government’s subsidy figure refers entirely to the transfer to oil marketing companies in the name of reducing the retail price of diesel (while simultaneously taxing it to a larger degree). Thus the whole issue is precisely about retail purchase of diesel. The price hike was justified on the ground that it would reduce the subsidy given to diesel that is purchased from pumps. This, as G and P point out, is simply not true. Others, by the way have made this common sense point in even more detail; I can supply additional references as required.

    You’re quite right, I don’t agree with you :).

  4. September 17, 2012 10:55 PM

    The author played a neat rhetorical trick. He first said “there is no subsidy on diesel”. And then said, as crucial supporting evidence, “Indians pay well above the international market price for petrol.” The latter is true, if misleading. (In few countries is the wholesale price the same as the pump price.) But it does not support the claim that there is no subsidy on diesel. THe international price of diesel fuel is Rs 62 a litre. The domestic price of diesel is Rs 47 a litre. That is, of course, a subsidy. Chandru and Jayati Ghosh perform a similar rhetorical trick in the article the author links, by comparing Central government subsidies with Central+state government revenues. It is not the government that is being deceptive here.

  5. September 17, 2012 11:00 PM

    Even if reframed as a question of “how much to tax fuel overall”, remember that lower taxes on petrol and diesel are generally considered to be an idea associated with conservatives who believe (a) that taxes are bad and (b) people should drive cars. Europe, with the highest taxes on fuel, more correctly believes a progressive solution is high taxes on fuel + subsidies for public transport. Taxes on petrol/diesel generally have a higher incidence the richer you are, and are thus desirable, especially in India where the tax system by and large has the opposite effect.

  6. September 17, 2012 11:04 PM

    Note: the author is, however, correct about the Icrier study’s flaws. That being said, many of the justifications for FDI in retail — the need to mobilise investment in agricultural supply chains, etc — are independent of that report.
    The author is 100% correct about the fear of an international capital drain underlying the inability to implement GAAR on a timeline, closing the untaxed Mauritius route for foreign investment, or to go after Vodafone-like entities. However, note that cheaper fuel would worsen India’s current account deficit, making a dependence on international capital flows more acute. If all the author’s recommendations were implemented, India would be in severe trouble in terms of its external account.

  7. September 17, 2012 11:10 PM

    Damn, final comment: whoever “Suresh” is makes a good point, if unclear. If Ghosh, Chandrashekharan and Gopalakrishnan want to expand the debate from just diesel to all petroleum products, they need in addition to look at all further subsidies down the entire chain of administered prices. This includes the input prices for gas-fired petrol plants, for Indian Railways, for BEST and DTC.

  8. ShankarG permalink
    September 18, 2012 6:47 PM

    Just to respond to some of the points that MS makes: Firstly, he claims that “THe international price of diesel fuel is Rs 62 a litre. The domestic price of diesel is Rs 47 a litre.” I am not sure what international price he is referring to. As per the Petroleum Ministry’s “Basic Petroleum Statistics” (available on their website, see Table 21), the international market price of diesel works out to around Rs. 31 per liter (at present exchange rates – in 2011, the time of the figure, those rates were lower). In any case the international price of diesel is irrelevant – India is a net exporter of diesel and the Indian diesel supply is from domestic refineries. The government did not refer to any rise in diesel prices but to the rise in the actual imported commodity – crude oil. As per the government’s own data supplied to Parliament in April 2011, the price of diesel – then Rs. 37 – included Rs. 11 worth of taxes (or nearly 30%). As such, the current hike could have been avoided entirely by cutting taxes, and MS is quite wrong. As far as MS’ contention that diesel taxes are a good thing is concerned, I agree, in principle; but surely that should be what the government is arguing, not hiding behind accounting tricks. Moreover, even if that is true, such taxes are not at all progressive and do not harm the richer more – like any indirect tax they are regressive in nature because they have a harder impact on those who absolutely must purchase these products (either directly or indirectly), and particularly as diesel is a “universal intermediate” which is vital for most daily foods. If the government really wanted to engage in progressive diesel taxation, it would start by increasing the excise duty on diesel passenger cars – yet even this most obvious step was ignored because of pressure from the auto industry. Indeed, there are far more activities in this country that deserve to be taxed than diesel consumption. In regard to the subsidies for power plants etc., do remember that this remains utterly irrelevant and has nothing to do with the government’s claims. Finally, the point regarding the current account deficit is classic financial market sophistry. On the one hand those who support “reforms” want us to blieve that investment is flowing to INdia because of “strong fundamentals”, the size of the Indian market, the “rule of law” and even supposedly because “India is a democracy.” Yet apparently all this investment will turn tail and run as soon as India enforces its tax laws! If this is true, it tells us that 20 years of reforms have rendered our financial system dependent on speculators and tax dodgers (which is in part true); if it is false, there can be no harm in the GAAR or in pursuing the Vodafone case.

    • September 19, 2012 12:26 PM

      Wrong on pretty much every count.
      1. If you look at the report you quote, the Ministry of Petroleum uses Persian gulf prices for diesel at the pump. (and even then, it comes to around Rs 45/l, not 31/l.) These are misleading, as they are obviously different from diesel for export, per barrel. I used Singapore commodity exchange prices for diesel per barrel to reach the conclusion you quote.
      2. Even if people are scared off by the numbers, here are the basic facts: As I’m sure you know, modern diesel is more expensive to refine than petrol. The overall cost of diesel, therefore, must be higher than petrol. Petrol is currently rs 80/l or thereabouts. Do you wish to explain how diesel is just over half that without subsidies? Have fun doing so.
      3. India is a “net exporter of diesel” but a net importer of crude oil, obviously, which is where price pressures come from. We look at intl prices of diesel to benchmark the costs of refining, nothing else.
      4. “The current hike could have been avoided completely by cutting taxes” Eh? Sure. But that wouldnt have been deceptive? You say that the govt said Rs 11 of the price was taxes. ( I cant find this data, incidentally.) Even if true, so what? Part of it is state taxes. And why should diesel, alone among commodities, be exempt from 12.5 per cent value-added tax? Is it so virtuous? In fact, it’s the exact opposite.
      5. Simply put, the fancy, deceptive accounting footwork is being done by you, Chandru and Jayati to try and argue that diesel is being sold *less expensive than it costs to make* except for taxes. THIS IS EMPHATICALLY NOT TRUE AND IS THE DEFINITION OF A SUBSIDY. I don’t see why that is so difficult to accept.
      6. This “universal intermediate” claim for diesel being non-regressive is absent any empirical basis. Please demonstrate that the diesel content of poor people’s food is the same as that of rich people’s food in India? You can’t, incidentally, for it will directly contradict every other study on the energy intensity of Indians’ diets by economic class. Simply put: aside from subsidised wheat, rice and sugar, poorer Indians eat local; richer Indians eat veggies trucked in from elsewhere. Your claim is limited, again, to the middle-class.
      7. Excise duty on diesel cars: a bloody necessary thing.
      8. Subsidies for power plants etc “remain irrelevant” — OK, sure. But IT IS EXACTLY AS IRRELEVANT as expanding the scope of the “diesel subsidy regime” only as far as other petroleum products AND NO FURTHER. You want to cherry-pick the domain of “subsidies” to try and make it sound like the govt is making money of it — when the government has actually created a (far too) complex set of cross-subsidies and interlocking taxation across the ENTIRE energy and transport sector, which is overall soaking up money we need for health, education, etc.
      9. On the “classic financial market sophistry” — oh please. The financial markets are evil, cynical things which I despise with a passion. I was pointing out that your set of arguments are COMPLETELY INTERNALLY CONTRADICTORY even if you detest the financial markets. That reforms have increased India’s external dependence is unquestionable. I agree. It is sad. That does not change the fact that you have nothing to say in response to the basic fact that all the things you suggest, if implemented simultaneously will — basic commonsense tells you — result in crashing disaster in the next three months. That’s not sophistry, its an angry irritation with the constraints that financial-market stupidity imposes on national action. But those constraints are real, not something that you can imagine away, as you’re trying to do.
      10. More generally, the middle-class bias of some in the Left in this country in which they agitate precisely for those issues that concern the middle class — as evident from the number of times that they agree on economic policy with the party of the petit-bourgeoisie, the BJP — should be a cause for worry.

      • ShankarG permalink
        September 19, 2012 11:22 PM

        MS, since we seem to agree on more than we think we do, perhaps we should both adopt a more friendly tone :). Before responding to your factual disagreements, I think you are missing the point of this article. There are two related issues here – the policies themselves and the power relations that lie behind them. You do not seem to be engaging with the latter. This is not a policy paper. it is concerned with exposing the fact that the real basis for decision making int his country is what you choose to describe as “constraints” but which is more accurately called the exercise of political power by certain sections of capital. I may agree with every argument you make; but the reality will still be that not a single one of those arguments, leave alone your point that “the government has actually created a (far too) complex set of cross-subsidies and interlocking taxation”, has ever been stated by a single government body as a justification for what it is doing. My point with this brief note was only to expose to others what you seem to already know – that policy making on these issues, and indeed on most issues, is not driven by stated reasons and there is nothing inevitable about it. We can debate on what policy should be adopted until we are blue in the face, but until you break the artificial consensus that has been created, both the perspectives we represent are irrelevant.

        As for the factual issues, international commodity prices are not a reliable way to represent costs, as you would know. The Rs. 11 figure is from an April 2011 question in Parliament, quoted elsehwere, but I’ve since found one from December 2011 for even more recent data (Rajya Sabha Starred Question No. 392 answered on 20.12.2011). It states that out of the then retail price of diesel, Rs. 40.91, Rs. 7 consists of taxes. It also reveals that the budgetary support by government to OMCs in 2010 – 2011 and April – September 2011 is exceeded by the excise duty alone on petrol and diesel in that period, never mind the VAT and other duties / taxes (please do not include the “under-recoveries” etc. – the government’s claim is that the fiscal deficit is being increased by its payouts to OMCs). Refinery payments in India are settled not on the basis of costs but on the basis of “import-export parity”, so they are quite artificial; in any case, even with these artificial costs, retail diesel was and is not subsidised. With regard to your claims that diesel is not important for the food consumed by the poor, you appear to forget that cities do not consist of the middle class alone, that in rural areas too transport of food occurs, and that inflation is a generalised phenomenon that affects the entire economy by a ripple effect (not only the things where diesel is consumed directly).

  9. Sunalini Kumar permalink
    September 20, 2012 9:42 AM

    @ MS. Who are these locally-eating poor, man? What you are saying doesn’t apply to the urban poor in any case, because you’d have to then prove the existence of vegetable patches and farms around slums and bastis or even around lower middle class colonies large enough to support the local poor population, and make trucking unnecessary! The urban poor buy their veggies from the sabziwala, who buys it usually from Azadpur or Okhla mandi, which stock vegetables from all over North India, sometimes further afield. Our domestic help’s son used to be a vegetable vendor who lived in one of East Delhi’s biggest slums, so I know this. (By the way, in that slum, rice and dal has been replaced by Maggi as the staple). The only exception in Delhi are those small bunches of people still living on the banks of the Yamuna – they grow some veggies, not all. And certainly not rice and pulses. In Bombay, even the sides of the local train tracks and large drains are used for growing veggies for the market – that shows you the profitability of vegetables. As for the rural poor, in the smallest of villages around Delhi, people have been buying vegetables and pulses from the market for at least a decade now. Single-cropping of high-input, high-yielding wheat and rice has destroyed local agricultural self-reliance or subsistence (if you want to put it less romantically) almost entirely. With the use of fertilisers, the soil is depleted, and will not respond to simple cultivation techniques, growing vegetables on the bunds and borders is no longer happening. Plus whatever family vegetable patches existed around the homestead have been given over to other uses due to growing space crunch – storing machinery, fodder, sometimes firewood and dung cakes. I have seen this in village after village – people buy their vegetables and most pulses. The only exceptions are places where organic or multi-crop farming is taking place.
    Where does that leave the middle-class bias on diesel?

  10. September 20, 2012 9:58 AM

    Plus, for somebody so fond of studies, you have forgotten study after study which shows that the proportion of spending on food vis-a-vis the overall budget increases proportionally as you descend the economic scale. Shouldn’t this be taken into account when we compare the energy intensity of poor versus middle and upper class diets?

  11. September 20, 2012 4:57 PM

    Shankar: My simple point is that diesel is subsidised. That it is part of an interlocking web of cross-subsidies and state ownership does not take away from the fact that it is the excessive subsidy on diesel, driven by the international price of fuel, that is the most pressing component of the recent expansion government’s fiscal deficit, which has now grown large enough to constrain the expansion of important welfare programmes in healthcare and for the urban poor. This is the point that many inside and outside government are making, and I do not see it as deceptive — even if there are other fuel products, such as air turbine fuel, on which the state sector *as a whole* makes a profit.

    Sunalini, we agree your argument applies mainly to the urban poor. In response, I can only quote the NSS surveys in response to you on the spending on vegetables, which have shown a significant increase across income levels — but not, it seems to the degree that there is any parity between classes. (Much more seems to be spent on protein-based foods, actually, but the price of milk in particular, and thus of its products, is separately controlled in many states.)
    Meanwhile, the undeniable fact that the poorer you are, the more of your income you spend on food does not mean that a diesel subsidy is therefore less biased. The fact is that it enters the poor person’s budget mainly through food; it enters the middle class’ budget through a dozen other components of their expenditure.
    The simple fact is that this is not, because of the fact that it has too many beneficiaries — even if you refuse to accept the fact that it is biased towards the genset-using, globalised middle class — not the way the government should be spending its money. The fact that the lack of money thanks to the fuel bill is delaying the food security bill or universal healthcare is a disgrace.

    • ShankarG permalink
      September 21, 2012 11:01 AM

      MS: “My simple point is that diesel is subsidised. That it is part of an interlocking web of cross-subsidies and state ownership does not take away from the fact that it is the excessive subsidy on diesel, driven by the international price of fuel, that is the most pressing component of the recent expansion government’s fiscal deficit, which has now grown large enough to constrain the expansion of important welfare programmes in healthcare and for the urban poor.” I have presented the figures above about how the excise duty alone covers the subsidy given to OMCs by the government. I fail to understand how you continue to talk of subsidies. As for “under recoveries” being paid for by the govenrment, there’s no reason for this to be done, when the concerned companies are still making large profits overall and are very, very far from bankruptcy. As for this constraining welfare programmes, the failure to deal with tax evasion, the continuous exemptions and tax reductions given to sections of finance capital (for instance, no one any longer talks of either enforcement or increase in the securities transaction tax). What about the elementary step for a windfall tax on those given land, coal and forests for free? What is this if not a subsidy? These are clearly the source of the fiscal deficit rather than non-existent diesel subsidies. It is indeed deception at work.

  12. September 20, 2012 4:59 PM

    Shankar: my first line in the earlier post should have read “…subsidised by the Centre.”

  13. September 20, 2012 5:04 PM

    Oh and two more points, Shankar: First, the under-recoveries of state-owned companies will eventually be paid for by the Indian taxpayer, either directly through current budgetary support, or through decreased revenues to the state-owned oil production companies, or through some other fiddle. Eventually, it means less money for the government either way.
    And while I agree on the generalised inflationary ripple effect, I think most people would say a high fiscal deficit has a greater and longer inflationary effect than a rationalisation of diesel prices at the pump. (I havent seen any persuasive argument to the contrary.)

  14. seeta permalink
    September 20, 2012 11:38 PM

    for all those that believe walmart is going to bring more employment, time to make it stick, then:

  15. September 22, 2012 9:45 AM

    MS, so suddenly it is gensets that define the middle class, is it? Not, say, the more ubiquitous inverter? And a globalised middle-class lifestyle is a problem? What exactly is the relationship to diesel here? Anyhow, let’s grant that a removal of diesel subsidies will affect the middle class as badly as it would affect the poor, for which I must say, beyond gensets and a so-called ‘globalised’ lifetsyle you offer no statistics. And I thought you were in favour of economic reforms in general, that brought in globalised lifestyles in the first place. Anyhow, no prizes for guessing which class will be able to best or least painfully absorb the budgetary shock caused by higher fuel prices. The big guys, the political and economic heavyweights who may happily trade in an increase in diesel prices for a promised reduction in fiscal deficit, which will presumably restore investor confidence. Leaving intact, as Shankar mentioned, the real rot in the system that allows spectrum or forests or coal to slip through the cracks towards the corporate sector. Oh no wait, the lower fiscal deficit will miraculously re-direct precious government money into education and healthcare. Allow us to be sceptical.

    • Haresh permalink
      September 24, 2012 2:19 PM

      Use of diesel-based electricity generators is many many times more than inverters and is being used by 6-7 out of every 10 residential buildings/offices/shops in every city and town in the country. Inverters and batteries have limited capacities and are completely useless in areas where power cuts are for more than 10-12 hours per day. Subsidised diesel is easy to use in de-gens and can be run un-interrupted.

  16. Somnath permalink
    September 24, 2012 12:16 PM

    Its circularity of numbers when economists, more so storied ones like Jayati Ghosh talk of indirect taxes on fuel outstripping the government funded “under-recoveries by OMCs. Essentially, around 2.5 lac crores accrues to the (central and state) treasuries on account of fuel taxes. Around 1.5-1.75 lac crore is the estimated under-recovery. If the entire increase in prices is absorbed within the fisc, the state has to simply borrow another 1.5 lac crore or worse still, print additional money worth that much – both of which will have a worse impact on inflation than a straight price increase.

    There is a lot amusing about the never-ending spectacle around oil prices. Somehow, it is ok for prices of everything – food, medicine, services, education – to go up, but fuel prices should be kept down artificially! Just as free electricity in states like Punjab has denuded ground water and soil quality (attributable mostly to the larger farmers), an artificially depressed level of diesel prices keep diesel-intensity of the economy high, and growing.

    Unfortunately, for most people in the political establishment (and some in the LEft liberal commentariat!), repeating the same mistakes over and over again is preferable to trying out new things and at least making new mistakes!

  17. Rajesh Gajra permalink
    September 24, 2012 7:02 PM

    I am only focusing on the author’s argument that there is no subsidy on diesel. That argument is based on the premise that excise/customs duties received from sale of diesel far exceeds the under-recoveries (difference between buying price of imported diesel and local pumps’ selling price-minus-excise&othertaxes).

    It is a fact that this excise-cum-custom tax receipts exceed the under-recoveries. But does it mean that the domestic selling price of all imported products should be kept lower than the international price at which it is purchased by an amount that matches or is a bit lower than the quantum of excise and customs?

    For instance, should gold and diamonds, imported from abroad be sold in India at a price lower than the price at which it costed for the importing jeweller? After all government is receiving customs and excise duties on it (leave aside the fact customs duties are the lowest among all imported items which in my opinion is another scam that the likes of Manmohan Singh and Chidambaram and their NDA-predecessors will want to brush under the carpet). So, should Indian government make jewellers sell gold/diamonds at lower than their purchase rates and then pay them back 50-90 per cent of the customs/excise collected from their gold/diamond sale?

    And, if some think diesel should not be equated with gold/diamonds since the latter is for the rich and affluent, then I would disagree. Anywhere between 40 and 80 per cent of current diesel consumption in India (trucks whose 70-90% supplies are consumed by the affluent, diesel-generators which provide electricity to the affluent urban consumers, diesel-engined SUVs and passenger cars driven by the affluent and tractors/de-gens operated by rich farmers) is for those who do not deserve it — the affluent. By affluent, I mean the rich as well as the middle-middle-class and upper-middle-class.

    • ShankarG permalink
      October 3, 2012 1:17 PM

      Your question contains two errors. First, you ask “But does it mean that the domestic selling price of all imported products should be kept lower than the international price at which it is purchased by an amount that matches or is a bit lower than the quantum of excise and customs?” The point of the article, which you concede in your first sentence, is that the domestic selling prices is NOT being kept lower – it is being increased by taxes. Therefore, the analogy is off track.

      Secondly, even if you were correct, that is precisely the point. I am not arguing that diesel / petrol should or should not be taxed. But neither is the government. The government is lying by claiming, essentially, that they are not taxed but subsidised (in much the manner that, for instance, food is). This is a lie. The question is – if what you and MG and others argue was all true, what is the need for this lie? Clearly, the government does not want to draw attention to things that should be taxed much more, but which are being in reality – and actually – subsidised. This is a sleight of hand intended to defend much more powerful interests, not even those of the “middle class” and the “affluent” and so on that keeps being returned to (despite being refuted several times in this thread).


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