Home >industry >banking >Excise duty cuts on fuel will increase fiscal deficit: Moody’s

Mumbai: Rating agency Moody’s Investors Service on Tuesday said last week’s excise duty cuts on fuel prices by the central government will increase its fiscal deficit and is a negative to the country’s sovereign credit rating.

Moody’s had raised India’s sovereign rating last year from the lowest investment grade of Baa3 to Baa2, and had changed the outlook to “stable" from “positive", on expectations that the government’s continued focus on economic and institutional reforms will, over time, enhance India’s high growth potential.

Out of the 2.50 price cut in diesel and petrol prices, the centre reduced excise duty by 1.50 per litre, while state-run fuel retailers took a hit of 1 for every litre sold. While finance minister Arun Jaitley said he was confident of meeting the fiscal deficit target of 3.3% of GDP this year, despite the centre’s revenue declining by 10,500 crore (0.05% of GDP) in the second half (October-March) of the current fiscal because of the excise duty cut on fuel, Moody’s said these measures create material downside risks to the central government’s fiscal deficit target.

“Because the government had already met 94.7% of the budgeted annual deficit by August 2018, to achieve its deficit target it will likely need to compress capital expenditure. Consequently, we expect the central government deficit target to slip modestly to 3.4% of GDP, while the combined general government deficit (central and state) should remain at about 6.3% of GDP," said Moody’s.

Jaitley, however, has ruled out any cut in capital expenditure this year to meet the fiscal deficit target.

Government revenue from excise duties on petroleum products has more than doubled since fiscal 2014. Unlike the central government, state governments charge value added tax (VAT) on fuel (which is outside of the central Goods and Services Tax net) as a percentage of prices and have, therefore, benefited from rising oil prices.

The push towards fuel price deregulation started with petrol in 2010, followed by diesel in 2014. The central government most recently cut its excise duty on petrol and diesel by 2 per litre after raising duties by 11.7 per litre on petrol and 13.7 per litre on diesel in nine instalments between November 2014 and January 2016.

In mid-2017, the government had switched to daily market pricing instead of fortnightly. Now, only kerosene and liquefied petroleum gas are directly subsidized.

Moody’s said though until now, fuel price deregulation had remained broadly on track with the government continuing to stress its commitment to maintaining excise duty rates and market-based pricing, with important state elections at the end of this year and the general election next year, the risk of backsliding on these commitments will increase if oil prices remain elevated.

The rating agency said though it has projected the Indian economy to grow at 7.3% in 2018-19 and 7.5% in 2019-20, intensifying external headwinds (tightening global financial conditions, high oil prices and trade tensions) and tightening domestic credit conditions present downside risks to our forecasts.

“We expect the stimulus of fuel excise cuts to have a limited effect on GDP growth. Although lower excise taxes will help offset some of the negative effect on household consumption from higher oil prices, a depreciating rupee and potential curtailment of government spending will likely mute the benefits," it added.

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