In the face of unprecedented tax revenue deficits this year, the Central government had hiked excise by Rs 10 per litre on petrol and Rs 13 per litre on diesel on May 5 (after raising taxes by Rs 3 per litre for both petrol and diesel on March 14).
Rising global crude oil price is seen to increase the already elevated inflation levels in the country, according to Barclays. “We estimate that a $10/barrel increase in the price of crude oil, to $55/barrel from $45/bbl, which implies a Rs 5.8/litre increase at the pump, would add about 34 basis points to headline inflation over three to six months, assuming no change to petroleum taxes,” analysts at Barclays said.
In the face of unprecedented tax revenue deficits this year, the Central government had hiked excise by Rs 10 per litre on petrol and Rs 13 per litre on diesel on May 5 (after raising taxes by Rs 3 per litre for both petrol and diesel on March 14). This did not allow consumers to gain from lower global oil prices of $20-30/barrel in the March-May period, and helped the government’s excise duty income to rise 41% annually to Rs 1.6 lakh crore in the April-October period.
However, crude oil price have clawed back to the current rate of $50/barrel on the back of Opec production cuts and anticipation of the Covid-19 vaccine.
“So while oil’s rebound is unlikely to destabilise India’s external balances, the government is faced with a new domestic trade-off between fiscal stability and sticky inflation,” Rahul Bajoria, chief India economist at Barclays said. If the government chooses to cut petrol and diesel taxes by Rs 5.8/litre to offset rising crude oil prices, it would result in a loss of revenue of Rs 87,200 crore.
“According to our analysis, this (cutting fuel taxes) would raise inflation by about 56 basis points given the current level of inflation and size of the fiscal deficit, but stretched over a longer period of one year,” Bajoria added.
In FY20, the total contribution of the petroleum sector to the exchequer stood at Rs 5.6 lakh crore, out of which Rs 2.2 lakh crore went to the states and the remaining to the Central government. Of the states’ share, around Rs 1.8 lakh crore came from sales tax and VAT on petrol and diesel.