India reconnected with the global economy three decades ago. The Indian economy had begun to gather pace around 1980, after at least a decade of stagnation in living standards as economic growth barely kept pace with the rise in population.
The growth spurt was accompanied by tentative changes in fiscal, monetary, trade, tax, exchange rate and industrial policies in the 1980s. However, the policy reforms of that decade were within the boundaries of the earlier system of economic management. July 1991 saw India shift to a new paradigm under a minority government led by P.V. Narasimha Rao, whose centenary year begins this week.
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In his landmark budget speech on 24 July 1991, Manmohan Singh as finance minister said that the severe balance of payments crisis that had taken India close to international default earlier that year was not a temporary funding crunch, but the symptom of a deeper malaise. The underlying problems he identified included macroeconomic imbalances, low productivity of public sector investments, loopholes in the tax system, indiscriminate protection that had weakened the incentive to export, lack of domestic competition, a weak financial system that was not allocating capital efficiently, lack of access to the latest technology, and much more.
A web of interconnected reforms were launched to tackle these problems. Many debates on the impact of it have focused on the growth trajectory before and after the reforms. There is no denying that the average annual growth rate in the 1990s is no different from the momentum of the 1980s. India moved to a higher growth trajectory only after the year 2000, and continued on that path after 2010, despite an economic slowdown before the pandemic struck.
Critics use this record to argue that the impact of the 1991 reforms was overrated. A better way to examine the impact is not by looking at just the rate of economic growth, but also its sustainability. The initial growth spurt of the 1980s was not sustainable, and India ended the decade with a terrible balance of payments mess plus raging inflation. Economic growth since 1991 has been far more stable.
One simple indication of this is the external account. Independent India had a severe balance of payments crisis almost once every decade: 1957, 1966, 1981, 1990. There has been no comparable crisis over the past 30 years, despite a scare in 2013.
Economists with a structural bent of mind used to argue that Indian economic growth has been held back by four major structural constraints: domestic savings, foreign exchange, food and aggregate demand. What has happened to each of them over the past three decades?
The short answer: all four macroeconomic constraints have eased after 1991. The domestic savings rate to fund domestic investments has undoubtedly come down since the peak it hit in 2008, but is still almost eight percentage points higher than the average of the 1980s. The availability of foreign exchange is no longer a major worry, and the occasional balance of payments surpluses in recent years show that India receives more international savings that it can absorb.
The food constraint had already begun to ease after the Green Revolution. India now has excess food stocks as a buffer against sudden shocks to farm production, though this macroeconomic reality does not mean that every Indian household has food security. The aggregate demand constraint—or what was once called the home market problem— meant that there was not enough domestic demand for industrial goods because of high poverty levels. Rising incomes as well as exports have eased this as well.
This potted history of how the structural constraints have eased is not to suggest that they are no longer a worry. A more realistic view would be that they are no longer as dominant as before, and the 1991 reforms played a big part in loosening these structural constraints that had dominated Indian economic thinking for many decades.
In fact, there are newer structural constraints on the horizon. The health and education crises during the pandemic have underlined inadequate investments in human capital. India still does not have adequate state capacity and regulatory capacity for a $3 trillion economy. And ecological stress as well as climate change will create new forms of constraints on sustainable economic growth. A new set of policy responses will be needed.
The implicit goal of the 1991 economic reforms was to create a new economy that had learned the right lessons from the success stories of East Asia. “Our longer-term objective is to evolve a pattern of production which is labour-intensive and generates larger employment opportunities in productive, high-income jobs, and reduces the disparities in income and wealth between rural and urban areas,” Manmohan Singh had said in his 1992 budget speech.
That transformation remains incomplete. In fact, the inability to generate enough jobs in formal enterprises has led to the proliferation of informal employment on the one hand and political pressure to use fiscal resources for subsidies or income support rather than on the creation of public goods. It is now worth repeating a question that this has been asked before: Is India moving in the direction of Latin America rather than East Asia?
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Petrol in India is cheaper than in countries like Hong Kong, Germany and the UK but costlier than in China, Brazil, Japan, the US, Russia, Pakistan and Sri Lanka, a Bank of Baroda Economics Research report showed.
Rising fuel prices in India have led to considerable debate on which government, state or central, should be lowering their taxes to keep prices under control.
The rise in fuel prices is mainly due to the global price of crude oil (raw material for making petrol and diesel) going up. Further, a stronger dollar has added to the cost of crude oil.
Amongst comparable countries (per capita wise), prices in India are higher than those in Vietnam, Kenya, Ukraine, Bangladesh, Nepal, Pakistan, Sri Lanka, and Venezuela. Countries that are major oil producers have much lower prices.
In the report, the Philippines has a comparable petrol price but has a per capita income higher than India by over 50 per cent.
Countries which have a lower per capita income like Kenya, Bangladesh, Nepal, Pakistan, and Venezuela have much lower prices of petrol and hence are impacted less than India.
“Therefore there is still a strong case for the government to consider lowering the taxes on fuel to protect the interest of the people,” the report argued.
India is the world’s third-biggest oil consuming and importing nation. It imports 85 per cent of its oil needs and so prices retail fuel at import parity rates.
With the global surge in energy prices, the cost of producing petrol, diesel and other petroleum products also went up for oil companies in India.
They raised petrol and diesel prices by Rs 10 a litre in just over a fortnight beginning March 22 but hit a pause button soon after as the move faced criticism and the opposition parties asked the government to cut taxes instead.
India imports most of its oil from a group of countries called the ‘OPEC +’ (i.e, Iran, Iraq, Saudi Arabia, Venezuela, Kuwait, United Arab Emirates, Russia, etc), which produces 40% of the world’s crude oil.
As they have the power to dictate fuel supply and prices, their decision of limiting the global supply reduces supply in India, thus raising prices
The government charges about 167% tax (excise) on petrol and 129% on diesel as compared to US (20%), UK (62%), Italy and Germany (65%).
The abominable excise duty is 2/3rd of the cost, and the base price, dealer commission and freight form the rest.
Here is an approximate break-up (in Rs):
a)Base Price | 39 |
b)Freight | 0.34 |
c) Price Charged to Dealers = (a+b) | 39.34 |
d) Excise Duty | 40.17 |
e) Dealer Commission | 4.68 |
f) VAT | 25.35 |
g) Retail Selling Price | 109.54 |
Looked closely, much of the cost of petrol and diesel is due to higher tax rate by govt, specifically excise duty.
So the question is why government is not reducing the prices ?
India, being a developing country, it does require gigantic amount of funding for its infrastructure projects as well as welfare schemes.
However, we as a society is yet to be tax-compliant. Many people evade the direct tax and that’s the reason why govt’s hands are tied. Govt. needs the money to fund various programs and at the same time it is not generating enough revenue from direct taxes.
That’s the reason why, govt is bumping up its revenue through higher indirect taxes such as GST or excise duty as in the case of petrol and diesel.
Direct taxes are progressive as it taxes according to an individuals’ income however indirect tax such as excise duty or GST are regressive in the sense that the poorest of the poor and richest of the rich have to pay the same amount.
Does not matter, if you are an auto-driver or owner of a Mercedes, end of the day both pay the same price for petrol/diesel-that’s why it is regressive in nature.
But unlike direct tax where tax evasion is rampant, indirect tax can not be evaded due to their very nature and as long as huge no of Indians keep evading direct taxes, indirect tax such as excise duty will be difficult for the govt to reduce, because it may reduce the revenue and hamper may programs of the govt.