Modi’s fuel-tax hikes are putting brakes on India’s recovery

Dilip Lamba, who owns a transport company in Jodhpur in western India, has had more than three-quarters of his fleet of 50 trucks idling for months. Dharampal Nambardar, a farmer who grows wheat and mustard seed in Haryana state, is worried he might not make any profit this year.

The main source of their anxiety is not Covid-19, however, but rather a surge in fuel prices. The central government has hiked import and excise taxes twice this year even as it imposed the world's biggest coronavirus lockdown. Retail prices for diesel -- the lifeblood of India's economy -- in the capital New Delhi have jumped 30% since the end of April, while gasoline has risen 16%.

"Diesel makes up almost 70% of our operating costs," said Lamba, whose company carries everything from cotton to cement to leather goods all over India. "Higher diesel prices means higher freight charges. But customers aren't ready for it and we can't absorb the costs."

The central government raised levies on diesel and gasoline in March and then again in early May as the coronavirus battered the economy. There's been a staggering fivefold increase in taxes on diesel since 2014 when Prime Minister Narendra Modi came to power, while those on gasoline have more than doubled. State governments also impose fuel levies, which in Delhi state account for around a quarter of the retail prices.

Taxes on the two fuels now account for almost two-third's of what Indians pay at the pump, making Indian retail prices among the highest in Asia and almost double that in neighboring Pakistan. The recovery in global crude prices, meanwhile, has boosted Indian fuel costs even further in the last few months.

The high prices are adding another headwind to an economy facing the biggest contraction in four decades. Diesel powers India's trucking fleet, which carries two-third of the country's freight, and is also essential for construction and agriculture. Gasoline, meanwhile, fills the tanks of millions of motorbikes ridden by lower-income Indians.

"While pump prices across the world have mostly followed the drop in oil prices since last year, India is an exception," said Senthil Kumaran, a senior oil analyst at industry consultant FGE. "It's unusual to see such a steep increase in the taxes on diesel, as the fuel is deemed to be a driver of economic growth, especially in rural areas."

There appears to be little chance that Prime Minister Modi will take steps to curb the rising diesel and gasoline prices even as global crude prices recover. This year's fuel levy increases are expected to generate about $30 billion a year in revenue for the government, according to Bloomberg Intelligence, at a time when coffers are being squeezed by less income and sales tax and higher spending on welfare programs.

"The tax hike in early May is turning into a wider cost-push supply shock, reinforced by a rebound in global crude oil prices," Abhishek Gupta, India economist at Bloomberg Economics, said in a note. That's likely to push up inflation over the next few months, he said.

With industrial production still fragile as Covid-19 continues to spread in India, Oil Minister Dharmendra Pradhan's prediction last month that fuel demand will be back to pre-virus levels by September is looking tough to achieve.

There's already evidence that the high prices are curbing demand. Provisional fuel sales in June show that while India's overall consumption of petroleum products was 8% lower than a year earlier, diesel and gasoline consumption were down 15% and 14%, respectively.

"The cost of operations has increased exorbitantly and small truck operators are unable to pass it on to the consumers because demand is low," said Kultaran Singh Atwal, chairman of the All India Motor Transport Congress, the largest such grouping in the country. Almost half of India's truck fleet is still idle, he said.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement