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The Centre has increasingly depended on petrol and diesel to raise resources for its welfare programmes
There is room for excise reduction up to Rs 8/litre, research agency QuantEco said in a report after Organisation of the Petroleum Exporting Countries (OPEC) and its allies – together referred to as OPEC plus – failed to reach an agreement on raising crude output to meet worldwide demand.
“This gives the government the room to absorb a reduction in excise duty of up to Rs 8/litre (ceteris paribus),” said the agency in its report.
However, it added that the government may not concede the full amount given higher expenditure commitments.
“Assuming a moderate growth in petrol and diesel consumption in FY22 (post Q1 dip) as economy unlocks and mobility picks up, at current excise duty level we estimate gross excise collections at Rs 4.3 lakh crore in FY22 versus budget estimate of Rs 3.4 lakh crore (Rs 3.9 lakh crore in FY21),” wrote QuantEco in its report.
In early March this year, ICICI Securities said that there is room for excise cuts up to Rs 8.5/litre.
“We estimate excise duty on auto fuels in FY22 (April 2021 to March 2022), if it is not cut, at Rs 4.35 lakh crore versus budget estimate of Rs 3.2 lakh crore. Thus, even if excise duty is cut by Rs 8.5 per litre on or before April 1, 2021, FY22E budget estimate can be met,” ICICI Securities wrote in a note.
Up, up and away
The entire country is singed by rising prices of petrol and diesel. While petrol has touched Rs 100 a litre and diesel has crossed Rs 100 in many states, there is no sign of crude prices coming down in the near future.
With OPEC plus failing to clinch a consensus crude prices might remain elevated for the time being and can perhaps even rise further.
There is a rising chorus from different sections to bring down the taxes on these two essential fuels — excise at the Central level and VAT at the state level.
Policymakers are caught in a bind since the common people is facing all-round rise in prices due to the high taxes —more than 60% between the Centre and the states – on the one hand, and on the other the governments are raising resources to spend on different welfare schemes some of which have been adopted to provide relief from the pandemic.
Some of these Covid-specific measures include free delivery of foodgrain to about 80 crore people, provident fund subsidy to create blue collar jobs and direct cash assistance to the poor people.
Inflation impact
“A Rs 5 reduction in the excise duty of petrol and diesel would have a direct impact of about 8-10 basis points of softening on both CPI and WPI inflation, and equivalent amount of indirect or second order impact. Potentially a cumulative 15-20 basis points of moderation on both retail and wholesale inflation can be affected,” said Yuvika Singhal, economist QuantEco.
“On the fiscal side, it will imply a revenue loss of about Rs 57,000 crore in the remainder of FY22 to the Centre’s exchequer,” wrote the agency in a report.
Dependence on oil
The Centre has increasingly depended on petrol and diesel to raise resources for its welfare programmes.
According to figures submitted by former MoS Finance Anurag Thakur in Lok Sabha earlier this year, in 2014-15, the government collected Rs 72,160 crore as taxes on petrol and diesel. In the first 10 months of 2020-21 (a Covid-hit year, when consumption was lower), the tax collected on these two items stood at Rs 2.94 lakh crore – a four-time rise compared to 2014-15 figure.
On July 5, Mamata Banerjee recently stated in a letter to Prime Minister Narendra Modi that the government collected Rs 371,725 crore in FY21 – a five-fold rise compared to the 2014-15 figure.