Why Indian govt may cut tax on petrol, diesel, according to Morgan Stanley

  • Given inflation is already tracking at 6%, a further rise in oil prices and catchup of retail fuel prices will imply that inflation remains above the 6% mark, Morgan Stanley said

Livemint
Updated1 Mar 2022
File photo
File photo

Should fuel prices rise sharply due to rise in oil prices, Upasana Chachra of Morgan Stanley in a recent note stated that she expects the Indian government to consider a reduction in fuel excise duty cut ( 5-10/lt) to dampen the effect on inflation. 

However, given that higher oil prices would potentially weigh on growth and tax collection as well, any additional explicit stimulus (frontloading capex spending, increase spending under NREGA scheme) would be less likely in order to balance concerns on fiscal slippage, she said.

“Given inflation is already tracking at 6%, a further rise in oil prices and catchup of retail fuel prices (as retail fuel prices have been unchanged) will imply that inflation remains above the 6% mark. Further, widening of the current account deficit will put pressure on the currency which can weigh on inflation,” Chachra explained.

In the near term, Morgan Stanley sees the possibility of additional subsidies or fuel tax cuts to shield the corporate and household sector from the effects of a spike in oil prices. Longer term, higher oil prices will also provide the impetus for policy makers to accelerate investments in the energy transition, the global brokerage said in a note.

Central banks in Taiwan, Indonesia, Korea, and India will be hiking rates soon, and in India, Morgan Stanley sees the risks of an earlier move. As such, the Reserve Bank of India (RBI) may have to act sooner than expected i.e., possibly in the April policy review to preserve macro stability and increases the risk of RBI taking up front loaded rate increases, it added.

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