Oil price slump: Centre may not hike excise duty for petro products

So far as the Centre’s fiscal deficit is concerned, economists don't believe that declining oil prices would impact it much
The Centre has ruled out an increase in excise duties on petroleum, and believes that softening global crude prices would dampen inflation, which would induce the Reserve Bank to cut policy rates.

“We are not in favour of an excise duty hike as that would add to inflationary pressures for the end-users. Softening inflation due to oil prices would increase consumers comfort,” a top government official said.

“The crude oil prices have led to bond yields also coming down. This will also have a counter-inflationary impact, and could lead to a situation which is conducive for a rate cut,” the official said. On Monday, the yield on the benchmark 10-year Indian government debt slid below 6 per cent for the first time since 2009. It ended trading down 12 basis points to 6.07 per cent. 

For 2019-20, the Centre had estimated average crude price of $55 a barrel, and for 2020-21, it has been assumed at $50 a barrel. The official admitted the crude price crash would be beneficial for them on the fiscal front, but declined to give details.

Analysts believe the steep fall in the international oil prices would give the government a bonanza in terms of reduced current account deficit (CAD), even as it may not have much impact on reining in the Centre’s fiscal deficit.  

So far as the Centre’s fiscal deficit is concerned, economists don't believe that declining oil prices would impact it much. Nowadays, the burden of subsidies to the government comes for only LPG and kerosene. These subsidies were estimated at around Rs 38,000 crore for 2019-20, against about Rs 25,000 crore a year ago and Rs 41,000 crore in FY21.

The Centre might not be as adversely placed in terms of revenues as its taxes on petrol and diesel are lump sum. On the other hand, states would be much worse affected as their taxes — value added tax — are ad valorem.

Karnataka has already increased value-added tax. Aditi Nayar, principal economist at ICRA, believed other states would follow suit.  

So far as CAD is concerned, every $10 a barrel decline in oil prices could improve CAD by 27 basis points, according to the calculation made by Soumya Kanti Ghosh, chief policy advisor at the SBI group.

CAD is essentially a gap between what the country receives imports and what it pays for exports of goods and services but excludes capital accounts such as money that comes in and goes out from the stock markets.

Nayar pegged CAD at 0.9 per cent of the country’s gross domestic product for FY20 at the current oil prices, against 1 per cent that she was expecting earlier. She expected the deficit to come down to just 0.2 per cent of GDP in the fourth quarter of 2019-20, against 0.9 per cent in the third quarter and 0.7 per cent a year ago.
CAD remained over 2 per cent in the first quarter of FY20 and the first three quarters of FY19.

Nayar also projected CAD at 0.8 per cent for the next fiscal year against her earlier forecast of 1 per cent.  

Lower CAD basically means that the country would not require too much capital inflows to finance it.  

Devendra Pant, chief economist at India Ratings, said the country was net oil importer and hence softening oil prices would dampen CAD.

For instance, India is projected to be a net importer by $56.4 billion in the current financial year.

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel