Will soaring pump prices make Modi cut excise and take a revenue hit

Fuel price politics is an effective tool for the Opposition in Indian democracy. Prime Minister Narendra Modi used it effectively to mobilise people during his campaign for the 2014 General Election against the Manmohan Singh government.

Thousands of hoardings across cities screamed 'Bahot hui, petrol/diesel ki maar, abki baar Modi sarkar' (You have had enough of fuel price tyranny, this time vote Modi).
On assuming power he was lucky and the international crude oil prices crashed to an 11-year-low of $27 a barrel. This helped his government collect more in excise duty as well as reduce retail prices of petrol and diesel.

After making a windfall gain of more than Rs 4 lakh crore in revenue, through higher excise duty of petroleum products, the government seems to have run out of luck. The price of Brent crude has touched $78 for a barrel, pushing the price of petrol to Rs 84.40 in Mumbai on Monday (21 May).

The rise has turned the tables and made Modi government a target of the Opposition. The question is, can the government do anything to control fuel prices? Yes, It can.

Currently, more than half the price of petrol at the pumps comprise taxes, duties and dealers' commission. For diesel, it's over 40%. Since 2014 the Modi government has made a lumpsum selling oil. Nothing stops it from cutting taxes now. It must be remembered that crude prices haven't really touched their highest ever, which means they can rise further.

While the government gained handsomely through high duties, it has not been able to use to improve its fiscal situation. The demonetisation of Rs 1,000, and Rs 500 notes gave a jolt to the economy, increasing administrative costs due to the publishing of new notes. According to the Reserve Bank of India, the government spent Rs 21,000 crore in printing new notes. All it could manage was to extinguish its liability, on only Rs 16,000 crore worth of old notes, as they were not deposited back in the system.

The fiscal position of the government was further hit by the haphazard implementation of the Goods and Services Tax, which generated lower-than-expected revenue.

The tight fiscal position was exposed despite several denials in the last Budget, when Finance Minister Arun Jaitley announced a 3.5% fiscal deficit against the targeted 3.2% of the gross domestic product (GDP). Due to lower revenue generation and higher expenses, the government had to borrow Rs 50,000 crore more in the final quarter of the last financial year. The government also revised its deficit target for this financial year to 3.3% of GDP from 3%.

The Modi government has been denying pressure to reduce fuel taxes, but some are expected to keep in mind the upcoming elections to three state Assemblies as well as to the Lok Sabha in 2019.

If that does happen, the government will have to redo its fiscal math to accommodate loss in revenue from excise duty. Historically, government's do not mind breaching fiscal target in the last year of their term. Will the Modi government do the same?