The decision to cut the basic excise duty on petrol and diesel by Rs 2 per litre to "cushion the impact of rising international prices of crude petroleum oil is going to prove a bumpy ride for the government.
The Finance Ministry, on October 3, announced a cut in the basic excise duty on petrol and diesel by Rs 2 per litre effective from today to “cushion the impact of rising international prices of crude petroleum oil, and to protect the interest of common man”, but it is going to prove a bumpy ride as it adds the risk of missing the fiscal deficit target of 3.2% of GDP in the financial year 2017-2018.
Government’s fiscal deficit during the first five months (April-August), as announced just four days ago, touched a whopping 96.1% of the Budget estimates for 2017-2018. The Rs 2 per litre cut in basic excise duty on petrol and diesel is going to cost the government Rs 13,000 crore for the rest of the FY18, which Nomura says, adds to the risk that the government will likely miss its FY18 fiscal deficit target of 3.2% of GDP.
The government had aimed to restrict the deficit to 3.2% of GDP in the current fiscal as against 3.5% in 2016-17. In absolute terms, 3.2% deficit for the current fiscal works out to nearly Rs 5.47 crore. The fiscal deficit for April-August period stood at Rs 5.25 lakh crore. The Nomura reports further points out that the loss due to cut in the basic excise duty will account for 0.08% of GDP. The GDP in the first quarter of the FY18 already slumped to a three-year low at 5.7%, mainly due to transitory effects of the demonetisation and the switch to the GST regime.
The decision came barely two weeks after the oil Finance Minister Arun Jaitley ruled out cutting excise duty on petrol and diesel, saying that the excise revenue was needed to push public investment. With government bearing the burden of Rs 13,000 crore, it is likely that the impact would fall on public investment. Former ONCG CMD Dinesh K Saraf says the decision will make it difficult for the government to manage the fiscal deficit and the government should have waited for some more time as the crude oil prices are likely to stabilise, CNBC-TV18 reported. The similar views were of another former ONGC CMD R S Sharma, who told ET now that an excise cut in petrol and diesel was warranted when the international crude oil prices were low.
The rise in government’s fiscal deficit would also lead to more budgeted borrowing, which would subsequently have an impact on interest rates and inflation. The decision may also have an indirect impact on private investments, negatively impacting the market and the much-needed economic growth for India.