FM Sitharaman’s fuel tax cut will tame inflation but hurt Budget math; fiscal deficit may overshoot to 6.9%

Barclays said tax cuts on motor fuels could shave at least 20 basis points off headline CPI while the subsidy on gas cylinders may lop off 26 bps from CPI inflation.

Finance minister Nirmala Sitharaman on May 21 tweeted that as a result of the excise duty cuts, the retail prices will come down by Rs 9.5/ litre for petrol and by Rs 7/litre on diesel. (Reuters)

India’s fiscal deficit may overshoot to 6.9 per cent of GDP this fiscal year, after Finance Minister Nirmala Sitharaman announced various subsidies such as fuel tax cuts last week to lower the inflation, Barclays said in a report. The government had estimated the fiscal deficit to be 6.4 per cent of the GDP in Budget 2022, which may overshoot by 50 basis points in FY 2023. 

Tax cuts on motor fuels, cooking gas subsidies and duty cuts on imports could alleviate price rises, Barclays said, adding that the measures mean the overall fiscal deficit will likely exceed budgetary estimates by at least Rs 2 lakh crore.

Petrol, diesel tax cuts to shave off inflation by 20 bps

In a move to give relief to the common man, the government announced a slew of measures to counter the soaring inflation. The government announced excise duty cuts of Rs 8 per litre for petrol and Rs 6 per litre for diesel which would directly cost the exchequer a massive Rs 1 lakh crore annually. FM Sitharaman also announced an LPG subsidy of Rs 200 per cylinder for Pradhan Mantri Ujjwala Yojana beneficiaries. Apart from this, the government announced an additional fertiliser subsidy of Rs 1.10 lakh crore in the face of rising fertiliser prices due to the war in Black sea region.

Barclays said it sees tax cuts on motor fuels to shave at least 20 basis points (bps) off headline CPI (Consumer Price Index), while it seems the subsidy on gas cylinders to lop off 26 bps from the consumer inflation, adding that it will be spread over May and June. Additionally, the import duty cuts on intermediate goods such as plastics and steel, and supply side measures to reduce the price of cement are all likely to help in reducing latent price pressures in the economy, Barclays added.

Fiscal-monetary policy mix to curb inflation but not enough for RBI to stop rate hikes

Economists said these measures could help curb the inflationary pressures, however, it won’t be enough for the RBI to divert from rate hikes. “While the fiscal measures could help cool price increases, and modestly reduce pressure on the RBI to take front loaded rate hikes, they are unlikely to be sufficient to divert the central bank from its path of monetary tightening,” Barclays said in a report co-authored by economists Rahul Bajoria and Sri Virinchi Kadiyala.

In a separate report, Kotak Economic Research said the complementary fiscal and monetary policies to manage the adverse growth-inflation mix will likely lower inflation than earlier expected with a gradual growth recovery, however, it continues to call for a shallow rate hike cycle along with liquidity withdrawal. “We pencil in further repo rate hikes of 110-135 bps to 5.5-5.75% and 50 bps of CRR hike to 5% by end-FY2023,” the brokerage added.

Barclays expects the RBI to deliver a 50 bps policy-rate hike at its June meeting and to raise the rate to 5.15 per cent by August, ie returning to pre-COVID-19 levels of interest rates. “That may provide some room for the central bank to reassess its policy stance, and indicate that the bar for further tightening would be higher,” it added.

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