Over the last one year, there have been repeated suggestions to reduce excise on petrol and diesel. Finally, the centre has relented and announced cuts. This is likely to have a smart positive effect.
Centre takes the lead in cuts
In a way, the central government did what it always had to do. It just took the lead and announced an excise duty cut of Rs.5 on petrol and Rs.10 on diesel with immediate effect. This would make a huge difference to the cost of fuel in India. This may not even offset the duty hikes since March 2020 when the pandemic started, but this is a good first step in that direction. With crude prices moving higher, that was the best the government could do in this situation.
Most states follow suit
A day after the central government put out the rate cuts, a slew of BJP ruled states followed suit. Petrol and diesel are subjected to central excise and VAT at the state level. This is an important source of revenues for the states. It may be recollected that oil had been kept out of the ambit of GST to protect the revenue of the states. While almost all the BJP ruled states followed suit, the non-BJP ruled states like Maharashtra, Delhi, Rajasthan, Punjab, Tamil Nadu, Kerala, Telangana, West Bengal and AP are yet to announce VAT cuts. But that is a matter of time and these states will have to follow suit sooner or later.
Actually, it was the best option
The excise duty is going to cost the centre nearly Rs.45,000 crore in forgone revenues. However, that is a small price to pay. Higher fuel prices imposes a much bigger cost in the form of cost push inflation and makes Indian goods uncompetitive in the global markets. The sharp cut in excise duties on petrol and diesel, will be worth the revenues forgone. Experts have been maintaining that instead of infusing liquidity into the system or cutting rates, an easier choice would be to just reduce duties on petrol and diesel. It will have the effect of boosting consumption at a reasonable cost outflow to the centre and states.
Big difference to inflation
The biggest benefit of this move will come from lower inflation. In the last couple of months, the inflation level has only fallen due to the base effect. Key components of inflation like fuel inflation and transport inflation are running in double digits for long. Both these items in the inflation basket have very strong downstream effects! It is now expected that the combined cuts in excise and VAT by centre and states will reduce diesel prices by Rs.18-19 per litre on a median basis. That will make a huge difference to the persistent inflation problem that India has been facing. Of course, there is still the risk that crude prices could go above $80/bbl, but the cuts surely give lot of confidence!