After the recent increase in the prices of diesel, kerosene and LPG, two questions are uppermost in the minds of citizens. By how much will inflation rise and what will be the impact of customs and excise duty cuts on the fiscal bottom line?
In both cases, the impact will be negative. Consider inflation first. It is a foregone conclusion that the Rs 2 per litre increase in the price of diesel will work its way through and lead to higher prices. Inflation, as measured by the Wholesale Price Index, is likely to cross the 10% mark and perhaps even touch 11%. This is, but natural, as diesel is the fuel that moves the transport sector and will, directly and indirectly, lead to higher prices of food and other commodities.
The bigger worry, however, is on account of fiscal slippages from what has been budgeted for 2011-12. The budget this year had a fiscal deficit target of 4.6% of gross domestic product (GDP). This is certain to be breached. Friday’s fuel price increases was accompanied with a 5% cut in customs duty on petrol and diesel, a 5% cut on customs duty on crude oil and an excise duty cut of Rs 2.6 per litre on diesel. In total, this will lead to cut of Rs 49,000 crore in revenue to the government (around 0.5% of GDP). That is not all: the price increases only meet a part of the losses incurred by oil marketing companies due to “under-recoveries” and hence the government still needs to pay them to meet these losses. Interestingly, the budget had set aside Rs 23,600 crore as fuel subsidy, something that now looks to be quite inadequate. In addition, these companies are yet to be fully compensated for the losses incurred in 2010-11.
There are other factors that are bound to hit the government’s calculation. The possibility of meeting the disinvestment target (Rs 40,000 crore), too, looks uncertain at the moment. Then there is the issue of declining direct tax collections—a number that is yet to be quantified properly. It also needs to be remembered that a part of the revenue lost was to be shared with the states. State governments, in any case, have a far restricted room for fiscal manoeuvre. The loss of money weighs much more heavily on them. There is now pressure on these governments to do away with various fuel cesses. They can ill-afford to do that, but then such is the nature of populist politics that those who are least able to afford profligacy are the first ones to indulge.
The net effect is that whatever one’s level of optimism about the government’s managerial abilities, the 4.6% fiscal deficit target is now in the realm of miracles.
Can the government meet its fiscal deficit target? Tell us at firstname.lastname@example.org