By cutting taxes on oil products and increasing their prices, the government has done two things. One, it has thrown a lifeline to oil companies that were neck-deep in the red. Two, it has bought some more time for itself, perhaps in the hope that global oil prices will fall in the coming weeks and the need to push up domestic prices further will be far less intense.
But Wednesday’s policy move, though welcome, is just a stop-gap measure. The final goal should be aligning domestic fuel prices with global prices, with targeted subsidies?to?protect?the?poor.
The two most immediate effects will be a rise in the fiscal deficit and inflation. The government will lose an estimated Rs22,600 crore of revenue because of the tax cuts. That alone should push up the fiscal deficit to more than 4% of the gross domestic product (GDP), way above the Budget target of 2.5% of GDP. Add to this the civil service pay hikes and farm loan waiver. India is slipping towards a huge fiscal mess. Meanwhile, we expect double-digit inflation within the next month.