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Publisher's Note: The views mentioned in the article are of the author only.
Why Taxes on Petrol and Diesel Are Likely to Stay High
Tue, 12 Jun 2018
Everyone wants to live at the expense of the state. They forget that the state lives at the expense of everyone. -- Frederic Bastiat
In the recent past there has been a lot of hungama, for the lack of a better word, on the high prices of petrol and diesel. Most people would pay a lower price for petrol and diesel than a higher price. Like is the case with onions, people don't like the idea of paying more for fuels either.
Other than oil prices going up, high taxes on petrol and diesel are also responsible for the high price of the fuels. In fact, the central government as well as many state governments have increased the taxes on petrol and diesel, starting in late 2014. (In order to read in detail about the pricing of these fuels, you can click here and here).
It has been suggested that the governments need to cut taxes on petrol and diesel and help lower their prices. The reasoning offered behind this suggestion is very solid. As the oil price started to fall from mid-2014 onwards, the governments stepped in to increase the taxes on petrol and diesel and captured a good chunk of the fall in price.
Now that the oil price has gone up, with the Indian basket of crude oil going at around $75 per barrel, it is only fair that the governments cut taxes, and offer some relief to the consumers.
The question is that are the governments really in a position to cut taxes on petrol and diesel? While the ability of every state government to cut taxes is different, on the whole we can safely say that the governments are really not in a position to cut taxes on petrol and diesel.
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The answer lies in Figure 1, which basically plots the total expenditure of the central government as well as the state governments, over the years, as a proportion of the Indian gross domestic product (GDP).
Figure 1:
As can be seen from Figure 1, the total expenditure of central and state governments jumped from 26.3% of the GDP in 2014-2015 to 29.2% in 2016-2017. Data for 2017-2018 is not currently available. But it is safe to say that in 2017-2018, the total expenditure of central and state governments would have gone up as a percentage of GDP, in comparison to 2016-2017.
We say that simply because many state governments have waived-off farm loans. This has increased the expenditure of the state governments. The governments need to compensate the banks which had given these loans.
Also, it is worth remembering here that state governments have taken on debt of state electricity boards, as a part of the UDAY reforms. These debts need to be repaid. This has also pushed up the total expenditure of the state governments.
All this needs money. And governments earn money through taxes. This explains why taxes on petrol and diesel are likely to stay high in the months to come. We do not have data for the total expenditure of state governments and the central government for 2017-2018, because the total expenditure data for the state governments is not available.
What is available is the total expenditure data for the central government. How do things look on that front? Take a look at Figure 2, which basically plots out the central government expenditure as a proportion of the GDP, over the years.
Figure 2:
As is clear from Figure 2, the central government expenditure as a percentage of the GDP, has been coming down over the years. It has fallen from 14.9% of the GDP in 2011-2012 to 13.2% of the GDP in 2017-2018. During the current financial year, it is expected to fall further to 13% of the GDP.
So, does this mean that the central government is in a position to cut taxes on petrol and diesel, which make up for a significant chunk of the revenue that it earns through taxes. The answer again is no.
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The central government shares a major portion of the taxes it collects, with the state governments. And given that state governments need more money in order to finance their expenditure, the central government needs to collect as much tax as it possibly can.
Also, it is worth remembering here that the Bhartiya Janata Party, along with governing the country, is also a part of many state governments. Given this, the central government wouldn't want to deny the state governments their fair share of revenue.
Of course, there is a corollary that we need to state here. All this will remain true as long as we are a few months away from 2019 Lok Sabha elections. If the oil price continues to remain high even then, the government(s) might be forced to cut taxes on petrol and diesel. Voters tend to have a short-term memory. Hence, cutting taxes right now and jeopardizing the finances, does not make sense for the governments.
But when the question is of winning an election, every trick available will be used.
Stay tuned!
Regards,
Vivek Kaul
Editor, Vivek Kaul's Diary
PS: Every value investor knows that we buy when markets are correcting. The worry then becomes - buy what? The small cap space has enormous potential - and especially at a time like this. Do not miss this moment - get Hidden Treasure now.
Comments on this edition of Vivek Kaul's Diary: Post a comment | Read comments
Vivek Kaul is the Editor of the Diary and The Vivek Kaul' Letter. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.
The True Mission of Trump's Team
Tue, 12 Jun 2018
PARIS - Last week, it was war with Europe. This week, it's bombs over Toronto.
Plans are being drawn up for two walls. One across the southern border to keep Mexicans out. And one across the 49th parallel to keep Canadian products out.
According to the indictment, both nations are purloining American jobs.
Dream Team
But before we go any further, we would like to applaud Mr. Trump. The Trump show is all sound and fury, signifying God-knows-what...
But, occasionally - and apparently by accident - Mr. Trump seems to come up with the right message at the right time.
And he was 100% on target at the G7 summit in Quebec when he said:
- Ultimately, that's what you want. You want a tariff-free - you want no barriers, and you want no subsidies... That's the way you learned at the Wharton School of Finance.
But the Trump team never sticks to its playbook. Within minutes, the claptrap was back in the program and the clowns - Bolton, Kudlow, and Navarro - were back on the field.
What a team!
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Bolton on first base, covering national security; Kudlow, on second, making sure that the president gets some of the worst economic advice available; and then there's Peter Navarro on third.
We cringe when we see their faces on TV. They look like such sour-puss quacks...
Bolton is desperately hoping that another war will make him relevant again.
Kudlow is yearning to relive the glory days of the Reagan administration, but by bringing back its failed policies, not its successes.
And poor Navarro is thrilled to find that someone finally takes his corny trade proposals seriously.
And now, there they are...
Moe, Larry, and Curly... serving as top counselors to the president of the United States. He can humiliate them... contradict them... and ultimately replace them; perhaps that is really their role - to make The Donald look like a genius.
Happiness or Woe
But to fully understand our point of view - which could be right, wrong, or nothing at all - let us tell you about the wedding we went to on Saturday.
If you are a long-term Diary reader, you know that we regard marriage as the most ancient of all win-win deals.
People get together... with no guns to their heads... and make a life-long commitment. Two words of only three letters - "I do" - set the course for a lifetime of happiness, or woe, often both.
Let us begin our story at the end...
By midnight at this latitude, in Normandy, the light of the evening was used up and a heavy fog had fallen.
The ancient castle, lit up for the wedding, seemed almost ghostly... an apparition, as if it were floating somewhere in a dream.
Châteaux [CASTLES] in France are often surrounded by moats. Most have been filled as the need for them as a defense against attack diminished.
The invention of the cannon doomed Europe's moats. And by the 18th century, France's châteaux made little pretense of military purpose; they were just big houses, meant to impress the neighbors... the kind of house a hedge fund manager today might build on the Connecticut coast.
But this château was built in the 16th and 17th centuries, when it wasn't entirely clear how effective cannon would be. It had meurtriers [MURDER HOLES] down low, from where defenders could fire their arrows with little chance of being hit themselves.
Stout iron gates blocked the entrance. Stone walls and a moat protected the sides.
This château still had a canal, now dry, in front. And on one side was a small lake that went almost up to the side of the defensive walls. In it, we saw the château reflected so perfectly, it was hard to tell which was the real one and which was the imposter.
Disoriented by champagne and the thick mist, we might have stepped towards the front door and found ourselves in the drink.
Broken Furniture
We were among France's "beau monde," people with ancient aristocratic titles and still enough money to put on a proper wedding. Since the Revolution, aristocratic titles have no political significance, but people still dust them off for wedding invitations and funeral announcements.
Our invitation came from two marquis, a rank below duke and above count.
Typically, the wedding begins at three or four in the afternoon. It is followed by a reception for everyone and then a dinner for those who are invited.
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Usually, the dinner involves speeches, often a video montage, many toasts, dancing, and singing. A peculiar custom now current in France seems to be to stand on chairs and wave napkins in the air while singing some blustery tune.
Typically, too, the seating is organized. And since you are destined to spend several hours... at least until after midnight... at the table, your enjoyment of the event will be largely determined by the people around you. (You are never seated near your spouse.)
We were lucky. Our companions were jolly.
Still, it was a long day. We didn't get home until 3 a.m. But we kept our eyes and ears open and tried to learn something.
"Trump is amazing," began a man on our left. "Here in Europe, we still don't know what to make of him. He seems like a complete idiot, no offense..."
"None taken..."
"I mean, he doesn't know anything. What he thinks he knows is remarkably naive and foolish for a world leader. So he just does n'importe quoi [a pejorative in this context, meaning - any damned thing he wants]. And sometimes, it seems to turn out pretty well."
In Europe, as in America, the show is Trump. And the performances are all sold out.
"I like his negotiating technique. I know... It probably doesn't work most of the time. But it's fun to watch. He says something crazy that rattles everyone, even his own lieutenants.
"And then, when he's broken the furniture, everyone gets together and tries to figure out how to put it back together - but in better shape.
"We probably need someone like that."
Others weren't so sure. Not the foreigners. Not even the members of his own party.
"This cannot be our party," said Senator Jeff Flake (R).
"He beclowned himself [AT THE G7]," said Republican strategist Steve Schmidt.
Mr. Trump broke some chairs and some vases. Will the other G7 nations be able to put them back together?
We'll continue our wedding story tomorrow and find out...
Regards,
Bill Bonner, Bonner & Partners
Vivek Kaul's Diary
PS: Every value investor knows that we buy when markets are correcting. The worry then becomes - buy what? The small cap space has enormous potential - and especially at a time like this. Do not miss this moment - get Hidden Treasure now.
Comments on this edition of Vivek Kaul's Diary: Post a comment | Read comments
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.
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