The politics of populism

Or, why the Sensex doesn’t indicate voting patterns I must confess to feeling a little sorry for Finance Minister Arun Jaitley. The poor man had barely returned after a grievous illness when he was hit with the double whammy of a plunging rupee and soaring fuel prices. There was little he could do about the former, except perhaps curtail the endless demand for dollars by trying to do some demand-side management by imposing some trade curbs and hiking the odd tariff, which he duly did. The global equation There was even less he could do about the latter. Globally, crude oil prices are surging on the back of a rising dollar and U.S. President Donald Trump’s Iran sanctions potentially disrupting the principal oil production regions once again. The only arrow in his quiver was a cut in the taxes the Centre levies on petroleum products – which were hiked systematically over the past few years, when oil prices were falling. Currently, of the over Rs. 8 lakh crore the Centre collects as indirect taxes on goods and services, over 36% comes from taxes on petroleum products alone. This did two things. One, it kept fuel prices high even when crude oil prices were low. One could argue that this was done to save the planet, since higher prices would hopefully temper demand and therefore add less to the emissions load on the atmosphere. But the real reason was possibly because of the second impact of keeping taxes high on fuel — a windfall gain in revenues for the Centre, easing the pressure on the deficit and allowing the government to spend more. And, since fuel is outside the Goods and Services Tax, States also cashed in. State taxes on petrol vary from a low of 16.66% in Goa to a high of over 39% in Maharashtra, with most States veering towards the higher end of the spectrum. In fact, fuel taxes account for a fifth of all revenues for all States put together. But the situation reversed with oil prices surging. As petrol prices raced towards (and in some places, beyond) the Rs. 90 per litre mark, causing anger and dismay amongst the voting public, the only thing Jaitley, as Finance Minister of a government rapidly nearing another election, could do was to cut taxes on petroleum products, which he duly did by Rs. 1.50 per litre, while asking government-owned oil marketing companies to absorb a further Re.1 per litre from their margins. And what happened? There was a virtual bloodbath in the stock markets. Jaitley started speaking around 3.10 p.m. on October 4. By 3.15 p.m., prices of these oil PSUs started plunging. By 3.30 p.m., some had fallen over 20%. Fears of the Centre’s fiscal position worsening as result of the duty cuts further triggered a further generalised sell-off in the markets. In just two sessions on October 4 and 5, the Sensex plunged 1,600 points. In the week, which had only four trading days, the bellwether index lost 1,851 points — the biggest absolute one-week fall in its history! Poor Jaitley! Damned if he had done nothing on rising fuel prices, and damned because he did! With the RBI adding fuel to the fire by not hiking rates and adding, for good measure, that it did not have a ‘target’ for the rupee’s level against the dollar, the bear hug on the markets — currency as well as equities — is only going to tighten in the coming weeks. Why then, did the FM do what he did, particularly with elections looming? That’s because both he and the Prime Minister, who masterminds all this, are very good politicians. And politicians know something which economists often don’t – that when it comes to elections, populism pays.

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