Record excise duty hike on petrol, diesel unlikely to boost economic growth, help bridge fiscal gap, warns report

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Published: May 8, 2020 4:55:49 PM

The budget had revised upwards the fiscal deficit target to 3.5 per cent for the current fiscal.

The record excise duty hike on petrol and diesel will not help the government bridge the fiscal gap as planned, nor will it help boost economic growth as consumption demand will further be crippled, warns a report. Despite crude prices trading at a two decades low, the government had earlier this week hiked excise duty on petrol by Rs 10 a litre and on diesel by Rs 13 a litre to mop up nearly Rs 1.6 lakh crore in additional revenue this fiscal. With this the new effective excise duty on petrol is Rs 32.98/litre and diesel is Rs 31.83/litre.

Following the record hike in excise duty on petrol and diesel, the total incidence of taxation on auto fuels jumped to 70 per cent of the retail price. But the retail prices are not impacted as the hike completely wipes out the fall in crude prices.

“We continue to expect fiscal slippage of 2 per cent of GDP in overall fiscal deficit despite the oil tax hike of 0.7 per cent of GDP or around Rs 1.6 lakh crore,” Wall Street brokerage Bank of America Securities India said in a note on Friday.

Its 200 bps fiscal slippage is based on the assumption of another 30 bps fiscal stimulus to small and medium-sized enterprises (SMEs), state-run banks and realtors. “We expect the government to announce another fiscal stimulus of 0.3 per cent of GDP for SMEs, real estate and banks to support growth. This will likely push up fiscal deficit to 4.8 per cent of GDP, overshooting the FY21 budget target, by 130 bps.

“Accordingly, the states’ fiscal deficit will also rise 50-100 bps above our expected 3.1 per cent of GDP, says the report. The report also doubted the sustainability of the oil tax driven fiscal management as it remains to be seen if the tax hike is sustainable as the Brent crude is projected to climb to USD 39 a barrel by the December quarter.
The revenue gain of close to Rs 1.6 lakh crore will make sense only if the current prices sustain, and demand de-growth reverses, it said.

The budget had revised upwards the fiscal deficit target to 3.5 per cent for the current fiscal, against the previously set glide path of 3.2 per cent. And this report pegs a 200 bps slippage to this target for the year. Calling for more fiscal stimulus measures to tide over the COVID-19 pandemic, it forecasts an “additional 30 bps of GDP fiscal stimulus, atop the 35 bps already done, focusing on SMEs, real estate and state-run bank recapitalization, shortly.”

On growth, the report said best case scenario offers 1.5 per cent growth in FY21, lower than the 2 per cent growth many others have pencilled in. Even this 1.5 per cent growth is dependent on more fiscal and monetary stimulus and the Bank of America economists expect the Reserve Bank to slash the reverse repo by another 50 bps to 3.25 per cent by October.

As it is, we see a 100 bps downside risk to our 1.5 per cent FY21 growth forecast if the lockdown extends to June, with the restart taking up July. So to tide over the shock, we expect the government to announce an additional fiscal stimulus of 0.3 per cent of GDP on top of the 35 bps already done, the report said.

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