Perils of populist reform

By Prem Shankar Jha

With less than five weeks left to present the budget, the Government has begun to make a cautious set of reforms which will, among other things help it to contain its burgeoning fiscal deficit. Recently it announced two measures that were intended to help both the Central and State governments reduce their deficits. The first was to cut interest rates on small savings in post office savings accounts and public provident fund (retirement) accounts by one per cent. The second was to implement a single uniform rate structure for sales tax charged on petroleum products.

The former move will save the Central Government Rs. 1,000 crores immediately but its more lasting impact will be to initiate a lowering of the entire interest rate structure in the economy. Thus, as the present national debt matures, the Government will be able to roll it over at new, lower rates of interest. This will exert a steady downward pressure on the interest burden of the Central Government in the next few years.

The decision to levy a uniform rate of sales tax was long overdue. The reason why it could not be implemented earlier was that sales tax, as opposed to the excise duty, is levied by the State governments, and none of them was prepared to surrender its sovereign right to decide its own rates. It took the financial crisis into which they were plunged by the Centre's acceptance of the Pay Commission's wage awards to civil servants in 1997, for them to come to their senses and concede that charging different rates was actually beggaring all of them.

The bulk of the transport fuel consumed in India is not gasoline but diesel, which accounts for 43 per cent of the total consumption of oil products, and 88 per cent of the surface transport fuel consumed. The bulk of diesel is consumed by long distance truck transport, which accounts for 65 per cent of all long distance goods transport in the country.

Over the past four decades, therefore, truck operators had evolved a complex system of refuelling which took full advantage of differences in sales tax to minimise the cost of fuel to them. Thus paradoxically, States charging the highest rates of sales tax lost the most in sales and therefore tax revenue, while States charging the lowest rates increased their sales but only at the cost of minimising their sales tax revenues. A uniform tax sales tax rate will not only increase sales tax revenue from oil products as a whole, but also divide it approximately in proportion to the size and therefore the population of the States.

Unfortunately the impact of this highly desirable reform has been vitiated by a heavy dose of populism. Despite the fact that neither the tractor owning farmer nor the truck owner can by any stretch of imagination be called poor, the State governments have shied away from increasing diesel prices and have piled all of their revenue raising efforts onto gasoline. Thus while the sales tax on gasoline in Delhi has been raised by a full nine per cent (Rs. 2), that on diesel has been raised by less than one per cent (nine paise). This not only means that the already bankrupt State governments have foregone most of the revenues they could have raised, but that they have inadvertently increased the problem of air pollution that all large cities, but Delhi in particular, are suffering from.

The reason is that the new tax regime has increased the gap between diesel and gasoline prices from Rs. 10.09 to Rs. 12 a litre. This will accelerate the shift of car buyers from petrol to diesel powered vehicles. Until quite recently, it was believed that diesel was a much cleaner fuel than gasoline because its combustion does not release toxic nitrous and other gases. But a spate of studies has shown that the particulate matter from the combustion of diesel is every bit, if not more, as dangerous to human health as the emissions from gasoline. This makes a sick joke out of all the much touted anti-air pollution measures that the Government has been taking under pressure from the Delhi High Court and the Supreme Court, such as the introduction of lead- free petrol and LPG and CNG fuelled car and truck engines.

The former is intended to reduce toxic emissions from gasoline powered engines. It becomes irrelevant if people stop using gasoline altogether. The latter is intended to promote a shift from both petrol and diesel engined to engines powered by gas. This too will be frustrated if diesel is priced so low that the cost of conversion and use of gas becomes uneconomical. That is exactly what widening the price gap will do.

It seems that even a financial crisis that has made it impossible for State governments to pay their employees their salaries is not a sufficiently serious threat to make them give up their old populist ways. Ironically it is the urban poor who will pay the price for their generosity.

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Section  : Business
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