Inflation likely to come down by 30 bps after excise duty cut on petrol, diesel: Report

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The Central government’s decision to slash excise duty on petrol by Rs 5 per litre and diesel by Rs 10 per litre could reduce the consumer price index (CPI) inflation rate by up to 0.30 percentage points, according to a Business Standard report. However, as the second round impact takes time to come into effect, the result will not be seen in November inflation numbers, which are set to be released in December, the report added.

Meanwhile, in the four major metros of Delhi, Mumbai, Chennai and Kolkata, petrol prices were down Rs 5.26 to Rs 6.77 per litre and diesel prices were down Rs 11.16 to Rs 12.48 per litre as of November 4, when the cuts were implemented and remained at those levels on November 5. However, petrol prices in all four metros remained above Rs 100 per litre, while diesel prices fell below Rs 100. Diesel rates in Delhi were below Rs 100 per litre prior to the duty reduction.

According to the Petroleum Ministry, 22 states and Union Territories (UTs) have decreased VAT on fuel and diesel to provide assistance to consumers following the Centre’s decision to reduce excise duty on petrol and diesel by Rs 5 and Rs 10 respectively.

Opposition-ruled states yet to cut VAT

In the case of petrol and diesel, 14 states/UTs have not reduced vat on petrol and diesel. Several NDA-ruled states like Uttar Pradesh, Himachal Pradesh, Bihar, Gujarat, Goa, Karnataka, Uttarakhand and Assam have reduced VAT on these fuels but many Opposition ruled states are yet to implement any reduction in VAT. The states of  Maharashtra, West Bengal, Tamil Nadu, Telangana, Andhra Pradesh, Kerala, Meghalaya, Jharkhand, Odisha, Chhattisgarh, Punjab and Rajasthan are among them.

CPI Inflation

On the other hand, in the final five months of this fiscal year, the decision of the Centre to reduce excise duty might cost the government roughly Rs 60,000 crore, the BS report added quoting sources.

A Mint report quoted Rahul Bajoria, chief economist, Barclays as saying that the calculations show that the direct impact of this price cut on headline CPI in November will be 12 basis points (bps), and the indirect impact will be 12 bps in three months, bringing the overall impact to 24 bps.

According to Madan Sabnavis, chief economist at CARE Ratings, the Centre’s actions would have a direct influence on CPI inflation of 0.18-0.2 percentage points. The secondary impact, on the other hand, would be roughly 50% of the direct impact, and so could be around 0.1 percentage point, the BS report added. In September, the CPI fell to a five-month low of 4.35%, down from 5.59% the previous month.