The Indian government has a case for not cutting excise duty on fuel but not for long especially if weak demand continues to persist and global crude price continues to rise.
Higher spending on vaccines, additional welfare expenditure to alleviate the pain of the poorest, cushion to brave the third wave, and lower fiscal room are key reasons that the government has for not cutting excise duty on fuel.
The government has taken up nearly 1.5 lakh crore rupees of additional spending burden in the current fiscal as it attempts to help the poor through additional subsidy on fertiliser and extends its free food programme while announcing free COVID-19 vaccines for all.
In the budget, the government had made a growth-oriented spending plan with the base assumption that the worst of coronavirus was behind India. But the second wave of coronavirus that killed thousands of people threw a spanner.
The government is working on rejigging many of its expenditures including MNREGA allocation at a time when revenue collection from tax and divestment remains uncertain and the fiscal deficit for 2020-21 is at a record level of 9.3% of GDP.
The Centre has also pushed the consideration to reduce excise duty on petrol saying that states also need to cut their taxes on the commodity for a sustained and meaningful impact.
But the Centre’s reluctance towards cutting fuel prices emanates from the fact that a rupee cut would mean a revenue loss of nearly 14,000 crore in a fiscal year and the government will have to cut more than a buck to have a meaningful impact on the common man’s pocket. Taxes currently constitute 58% of the retail selling price of petrol and around 52% of the retail selling price of diesel.
But some argue that is not the best way to look at it at a time when fuel demand has slumped largely due to lockdowns and revenue collection will automatically fall.
Indian state refiners’ daily gasoline and gasoil sales fell by 19% month-on-month in May. Even though with easing lockdowns some demand recovery may start in June but a full recovery to the pre-pandemic level will be an uphill task as consumer sentiment remains weak owing to plunging income levels.
Even major Indian oil companies are struggling to predict a recovery in demand as reflected in the earnings commentary.
On June 4, the Monetary Policy Committee has said that Centre and states should cut taxes on fuel as inflation risk is building up in the system.
Some officials believe that the government should not increase the burden at a time when demand is weak as it will further hit demand and will nullify the gains from higher tax.
Hopes of a demand recovery in major western countries and China as vaccination numbers increase has pushed Brent up by nearly 40% this year and economists say that prices have a further upward bias with demand recovery in the US, Europe, and China.
This could further hit demand for not only fuel but also for car sales and stoke food inflation that has recently been tamed from the highs of October last year.
The government needs to act now if it wants consumption demand to pick up that will help a faster recovery in Asia’s third-largest economy that has been hit by two deadly waves of coronavirus or face the risk of stagflation.
