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Fuel tax hike: Govt to get strong fiscal support, inflation likely to rise

The Centre will gain Rs 1.4 lakh crore (0.67 percent of GDP) annually from the fuel tax hike, Barclays has estimated.

May 06, 2020 / 12:03 PM IST
Representative image: Pixabay

Representative image: Pixabay

The Centre, late on May 5, sharply increased the excise duty and road and infrastructure cess on petrol and diesel.

The Rs 8 per litre hike in the road and infrastructure cess will go into the Centre’ kitty. A part of the Rs 2 hike in excise duty on petrol and Rs 5 on diesel will be shared with states.

Apart from the increase in central taxes, Barclays said, several states and union territories, including Delhi, Haryana, Assam and Punjab, also raised the state tax on fuel.

"This is likely to result in a modest rise in fuel prices, given that the increase in the government's tax should not lead to higher fuel prices owing to the significant drop in crude oil costs through April," the global brokerage said.

International benchmark Brent crude futures fell 64 percent from its January high till April-end due to low demand globally on account of lockdown to limit the novel coronavirus or COVID-19 and heavy supply by OPEC and its allies.

A fall in oil price is good for a country like India, which imports 85 percent of its needs, as it saves precious foreign currency and helps lower fiscal deficit.

Any hike in excise duty or a cess on fuel is additional revenue for the government.

Also readGovernment hikes excise duty on petrol by Rs 10/litre and diesel by Rs 13/litre

Barclays estimated the central government's revenue benefit from hikes in fuel taxes could be as much as Rs 1.4 lakh crore (0.67 percent of GDP) on an annual basis.

"This is on top of an estimated Rs 2.8 lakh crore already being collected by the central government from the fuel tax/cess, which would bring the total contribution to central exchequer from fuel taxes to Rs 4.4 lakh crore (around 2.1 percent of GDP)," it said, adding these projections assume that demand for both petrol and diesel will fall 12 percent in FY20-21.

But costly fuel always has some impact on inflation, as oil marketing companies tend to pass the hike or a part of it to consumers.

"Since the central government is effectively appropriating the gains made by oil marketing companies for its own balance sheet, the effect on inflation from yesterday's hikes is likely to be limited. However, the fuel tax increases at state level are likely prove to be inflationary to some extent," Barclays said.

For the Consumer Price Index, the brokerage said a Rs 2 per litre hike in petrol leads to a 10-15 basis points direct increase in headline inflation, which is negligible.

However, combined with increased taxes on liquor, the fuel tax hikes are likely have some inflationary implications, it said.

Alcoholic beverages have a total weight of around 0.95 percent in the CPI basket. And Barclays estimated that even a 20 percent overall hike on alcoholic beverages leads to inflation around 18 basis points for headline inflation.

CPI and WPI inflation for April will be announced next week. Retail inflation in March eased to 5.91 percent against 6.58 percent in February due to fall in food inflation.

Given the fiscal benefit to central and states governments, now all eyes are on the bigger fiscal package to support the economy as well as corporate badly hit by the lockdown.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Moneycontrol News
first published: May 6, 2020 12:03 pm

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