Prices built up by ‘excessive taxes’, says Opposition; can’t afford fiscal slippage when CAD is taking a hit, feels government.
The retail prices of petrol and diesel may have risen for the tenth consecutive day on Tuesday, but the Centre has no plan to reduce the excise duties on the two auto fuels as it reckons that it can’t afford to miss the fiscal deficit target for the current financial year. “We already know that there will be a hit on current account. Knowing that we can’t disturb the fiscal deficit, we should rather be fiscally prudent,” a finance ministry official said.
Petrol and diesel prices touched fresh highs on Tuesday — Rs 79.31 and Rs 71.34/litre, respectively, in Delhi — as the rupee dipped to a record low of 71.54 against the US dollar, making imports costlier. Petrol price has risen by Rs 2.17 per litre since August 16 while diesel rates have climbed by Rs 2.62 — the biggest increase in rates witnessed in any fortnight since the launch of daily price revision in mid-June last year.
“Relentless rise in prices of petrol and diesel is not inevitable. Because the price is built up by excessive taxes on petrol and diesel. If taxes are cut, prices will decline significantly,” former finance minister P Chidambaram had said on Twitter earlier in the day.
However, the finance ministry official quoted above added that there were are not many avenues for the government to cut expenditure in order to meet the FY19 fiscal deficit target of 3.3% of the gross domestic product.
Putting a lid on spending, he said, could hit various schemes like Ayushman Bharat under which 10 crore families are to be given Rs 5 lakh health insurance cover.
A fiscal slippage would put further pressure on borrowing costs of the Centre as well as states, outweighing the benefits, the official said. The yield on 10-year G-secs has shot up by over 20% in the past one year alone due to rising overall pubic sector borrowings.
Both the Centre and states collect huge amounts as taxes from petroleum items. While the Centre collected `2.84 lakh crore from assorted taxes on the crude oil and petroleum products in FY18, 80% of it came from the excise duties on petrol and diesel alone. Through their taxes (VAT/sales tax/octroi, etc), state governments collected another `2.09 lakh crore from petroleum products in FY18.
Taxes are around 100% of the ‘base price’ of petrol or half its retail price.
While central excise duties (specific levies) remained static at `19.48 per litre on petrol and `15.33 per litre on diesel since October last year when these taxes were cut by `2 per litre, the state-level taxes have moved in tune with the fuels’ price increases. The state governments gain when prices soar thanks to the ad valorem value-added tax (VAT), sales tax and additional cesses/surcharges levied by them on these fuels. Of course, over 60% of the tax component in retail prices of auto fuels are due to the central levies.
Last week, credit rating agency Moody’s Investors Service said there are risks of India breaching the 3.3% fiscal deficit target for the current financial year, as higher oil prices will add to short-term fiscal pressures. The country’s current account deficit, it had said, would would not jeopardise India’s external position, and the gap would remain significantly narrower than five years ago. Also driven by higher oil prices and robust non-oil import demand, Moody’s expects India’s CAD to widen to 2.5% of GDP in FY19 from 1.9% in FY18.
India’s oil marketing companies revise retail prices of auto fuels on the basis of shat is called trade parity pricing, where (notional) import prices of these items are a vital determinant.
The global oil prices have risen around 10% in the last two weeks on the back of declining inventories and Iranian exports due to US sanctions. According to a report by Icra, while China and the EU intend to continue imports from Iran, banking channels and re-insurers are increasingly shying away, leading to a sharp cut in purchases. “Accordingly, Iran’s exports are estimated to have fallen by 0.6 million barrels per day (mbd) in August from 2.3 mbd in July. Consequently, the oil markets seem to be progressively pricing in expectations that the US administration would probably not grant waivers this time as it did during the earlier sanctions,” noted the report.