Softening the inflation blow: Centre has done its bit on auto fuels, states must follow suit

Very few states followed the Centre after the last round of cuts on diesel and petrol levies in November last year.

Very few states followed the Centre after the last round of cuts on diesel and petrol levies in November last year.

The government’s decision to forego an estimated Rs 1.06 trillion of revenues on account of excise duty cuts in petrol and diesel and subsidies on LPG cylinders is a move that was long overdue. This is expected to arrest inflationary pressures and act as a cushion for consumers in case oil marketers choose to raise prices of auto fuels. After all, duties and taxes account for 40-50% of retail fuel prices. The government also plans to spend an additional Rs 1.10 trillion on fertiliser subsidies—a fallout of costlier imports—and lower import duties on steel and raw materials for plastics products.

The additional expenses might have some impact on government finances, but the revenues for the current fiscal could exceed the conservative tax collection estimates of Rs 27.6 trillion. This would be primarily due to better-than-expected GST collections—the GST mop-up has been robust for the past nine months, with the April collections hitting Rs 1.68 trillion. Economists have also pointed out the growth numbers baked into Budget FY23 are conservative and that the Centre’s tax receipts, net of transfers to the state, could be Rs 1.4-1.5 trillion more than the budgeted Rs 19.35 trillion. Before the latest decision, finance secretary TV Somanathan had sounded confident that the additional expenses of Rs 1.8 trillion on fertiliser and food subsidies could be made up by better net tax receipts and bigger disinvestment proceeds.  However, it is early days yet, and given the uncertainty in the global economy with no end in sight to the Russia-Ukraine hostilities, talk of a recession in the US, poor visibility on crude oil prices, and rising interest rates, it would be prudent not to count one’s chickens before they have hatched.

At the same time, measures are needed to help rein in the runaway prices of goods and services that could hurt the nascent recovery and de-rail growth. Retail inflation for April came in at nearly 8%, well beyond the Reserve Bank of India’s (RBI’s) tolerance limit of 6%, and is threatening to choke consumption demand that has been generally sluggish for many quarters now. Private final consumption expenditure (PFCE) increased by 7% year-on-year in Q3FY22, but this came off an anaemic base of just 0.6% y-o-y in Q3FY21. As companies pass on their additional expenses on raw materials by way of price hikes, inflationary pressures could become entrenched. Against this backdrop, any effort to hold the price line will supplement the efforts of RBI, which earlier this month kicked off what could be the first of a series of interest rate hikes aimed at taming inflation. The 40-basis-points rise in the repo rate has driven up bond yields to levels of 7.3-7.4% at the longer end and even more at the shorter end. Should inflationary expectations go up, yields could spike further, making it harder for the government to borrow the Rs 14.31 trillion that it intends to do this year. It is important, even critical, that the government is able to mop up money from the markets to be able to spend, especially on capital expenditure. At Rs 12.2 trillion, the budgeted capex, including spends by public sector undertakings and Rs 1 trillion support to states, is an increase of only 10%. Consequently, the government must use whatever fiscal room it has—and it does have some—to support the economy.

Very few states followed the Centre after the last round of cuts on diesel and petrol levies in November last year. However, this time around, they must do their bit by lowering state-levies so that households see a meaningful reduction in prices and the cascading effects of already elevated diesel prices are curbed. States need to remember that the economy is as much theirs as it is the Centre’s and that any slowdown would hit them as badly. This is no time to resort to politicking.

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