Soaring diesel, petrol prices, rupee set to hit economy; govt can do very little

Surging fuel prices have the potential to destablise the economy as it is inflationary, can widen current account deficit, already hit by falling rupee and impact the strained fiscal deficit if tax cuts are resorted to rein in prices, say experts.

Dollar appreciation is resulting in the depreciation of several major currencies, including the rupee. This is putting additional pressure on an already widening current account deficit of the country.Image source: Reuters

The unusual spurt in diesel and petrol prices as a result of surging global oil prices and falling rupee poses danger to the economy, but the government can do very little to lower it at this stage due to difficult fiscal situation and widening current account deficit.

In fact, the government on Tuesday said that it will not cut excise duty on petrol and diesel to cushion spiralling prices, as it has limited fiscal space available to take any dent in revenue collections. "The government cannot disturb fiscal maths by cutting excise duty," a top government official said.

Surging fuel prices have the potential to destablise the economy as it is inflationary, can widen current account deficit, already hit by falling rupee and impact the strained fiscal deficit if tax cuts are resorted to rein in prices, say experts.

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As it is the Reserve Bank of India (RBI) is looking at a possible rate hike in the next monetary policy in mid-September, and there appears to be no way the government at this juncture would cut fuel prices unless global prices fall, which seem unlikely.

"There is already fiscal pressure and there are fears of fiscal deficit going up this year. So there is nothing much government can do to reduce the domestic fuel prices by cutting taxes, except to pass on the surge in global crude oil prices fully to the consumers," Deloitte chief economist Anis Chakravarty told DNA Money.

The spurt is basically supply driven factor and not demand driven due to declining global crude oil production. Also, dollar appreciation is resulting in the depreciation of several major currencies, including the rupee. This is putting additional pressure on an already widening current account deficit of the country.

But market analysts argue that one of the reasons for high domestic fuel prices is the high taxes. Both at the Centre and states, petrol and diesel are considered as milch cows for revenue mop up.

Petrol and diesel prices touched a new high early this week. Petrol touched a maximum Rs 86.56 a litre and diesel Rs 75.54 in Mumbai. The petrol price includes Rs 19.48 excise, dealer commission of Rs 3.63 and state VAT of Rs 16.83.

According to government data, the central excise duty on petrol and diesel more than tripled between 2013-14 and 2017-18. During the same period, state VAT increased more than 38 per cent. The excised duty on petrol increased from Rs 9.48 per litre to Rs 21.48 in four years.

In the case of diesel, it increased more than four times from Rs 3.56 to Rs 15.33 during the period. In other words, every Rs 100 spent on petrol nearly Rs 46 goes to the central and state government by way of taxes and in case of diesel, it is nearly Rs 36. One estimate put central and state collection from oil at Rs 5 lakh crore annually.

A $10 per barrel hike in global crude oil prices reduces GDP by 0.3% and a Rs 10 hike in domestic fuel prices push up inflation by 0.5%. With rupee crossing Rs 71 to a dollar and India importing 80% of its crude oil, there is very little scope for domestic fuel prices to come down without a cut in excise.

"Ultimately, the government might have no choice to cut excise. But at the moment they will wait and watch and cut excise ahead of the elections to reduce the unusually high domestic oil prices," economist and former planning commission member Abhijit Sen said.

Sen does not expect oil to come under the GST net, as states will oppose the move because this is one of the major source of revenue for them. With crude oil hovering around $75 a barrel from a mere $33 a barrel in 2015, several forecasts suggest that it could go up further with threats of a cut in oil production and US sanctions on Iran.

Oil minister Dharmendra Pradhan has ruled out any government intervention to disrupt the daily revision in petrol and diesel prices. He also felt that the spurt in fuel price is temporary.

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CRUDE REALITIES
1. One of the reasons for high domestic fuel prices is the high taxes. Both at the Centre and states, petrol and diesel are considered as milch cows for revenue mop up
2. Dollar appreciation is resulting in the depreciation of several major currencies, including the rupee. This is putting additional pressure on an already widening current account deficit of the country
3. The central excise duty on petrol and diesel more than tripled between 2013-14 and 2017-18

Source: DNA Money

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