Cutting excise duties on petrol and diesel likely to put pressure on budget deficit, experts say

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India’s reduction in excise duty on petroleum products is expected to put pressure on the country’s budget deficit, which is pegged at 6.4% of GDP for the current financial year FY23. These tax deductions will result in a loss of income of 1 lakh crore for the government.

Last week on Saturday, to relieve consumers of high fuel prices and multi-year inflation, the government cut petrol excise duties by a record high. 8 the liter and the one on the diesel by 6 per liter.

CIFAR, in its research note, said the loss of revenue for the Center in the remainder of fiscal year 2023 due to the recently announced excise duty reduction is estimated at 860 billion. Although this, combined with the under budget transfer of the RBI surplus and the need for additional spending on food and fertilizer subsidies, will confer upside risks to the budget deficit, much of this would be offset. by higher taxes on account of low growth built into the FY2023 BE for taxes and the assumption of low nominal GDP growth.

“We expect the fiscal deficit to increase slightly to 6.5% of GDP in fiscal year 2023, from a BE of 6.4%,” ICRA said in its note.

“Our calculations suggest that the direct impact of the central excise duty reduction on MS and HSD on the June 2022 CPI inflation print would be around 18 to 20 basis points. The number of states that reduce VAT rates will affect the potential first and second round impact on CPI inflation,” the ICRA note adds.

In addition, Chief Analytical Director of Acuity Ratings and Research, Suman Chowdhury, said the reduction in excise duties and the revision of rates on the import and export of certain products, including steel products , will have negative implications on the fiscal position for FY23, which could deteriorate beyond the 6.4% budgeted. , leading to higher borrowings, reported by PTI.

Chowdhury said it could also lead to slower export growth as commodities such as iron ore and pellets have contributed to stronger export growth over the past two fiscal years.

Meanwhile, a report by BofA Global Research pointed out that the government’s recent fiscal measures are expected to put pressure on the budget deficit.

According to BofA, the additional press articles increase the significant risk to our estimated disposal proceeds, and the recently approved The RBI’s 300 billion dividend to the government is also below the budgeted figures. Overall, we now see a risk of fiscal slippage of 40 to 50 basis points in FY23.

Finance Minister Nirmala Sitharaman in her February 1 budget speech announced a budget deficit target of 6.4% of GDP for the fiscal year 2022-23. This is in line with the broad fiscal consolidation path that FM announced last year to achieve a budget deficit level below 4.5% by 2025-26.

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