CEA K. Subramanian indicates a reduction in fuel taxes is unlikely
2 min read 14 Jul 2021, 12:18 AM ISTOn India’s growth outlook for FY22, Subramanian said double-digit growth is possible despite some impact from the second wave
PremiumThe government is unlikely to cut fuel taxes despite petrol crossing the ₹100 per litre mark in all metros, hinted Krishnamurthy Subramanian, chief economic adviser to the finance ministry. A cut in fuel taxes, he contended, is unlikely to have a significant impact on retail inflation because of its low weightage in the index.
The bigger concern is food inflation, not fuel, Subramanian said in an interview on Tuesday.
“If you look at the last 6-7 years, anywhere between 35-60% of contribution to retail inflation comes from food inflation," he said. “Weightage of petrol and diesel in CPI (Consumer Price Index) is less than 3% while weightage of food is about 50%. Even if you consider second-round effects (of the fuel price hike), the weightage is about 5%. So if you do an analysis, it becomes very clear that the contribution is not that large."
On being asked whether a cut in fuel taxes is off the table, Subramanian said: “When we look at it from the inflation perspective, what is the contribution (of petrol and diesel) to inflation is something we have to keep in mind. So we should speak based on data on all these aspects."
Subramanian said the rising crude oil prices is reflecting on overall inflation. Brent crude shot up from less than $30 per barrel last year to nearly $78 per barrel this month.
Retail inflation cooled marginally in June to 6.26% while remaining above the upper limit of the central bank’s inflation target for the second straight month.
Fuel inflation rose 12.7% as oil marketing companies continued to increase prices, in the process also raising the cost of transport and communication services.
In comparison, food inflation marginally inched up to 5.15%. However, core inflation excluding food and fuel items eased to 6.2% in June from 6.4% in May.
Subramanian said that some of the restrictions imposed during the novel coronavirus pandemic’s second wave are likely to have some impact on retail inflation, but core inflation has gone down in June, and the sequential momentum of retail inflation has also moderated.
“So, unlike after the first wave, when for nine months inflation continued to be above 6%, this time it is unlikely to be the case because of fewer restrictions. Some moderation is already visible. Overall, I expect retail inflation to be range-bound," he added.
On the growth outlook for the current fiscal year, Subramanian said double-digit growth is still possible despite some impact of the second wave of the pandemic.
“There is a good possibility that we may still get the growth that we projected, given that our original estimates (finance ministry: 10.5%; and Economic Survey: 11%) are not that aggressive. There will be an impact of the second wave but not very much," he added.
On the economic impact of a third wave, which many experts say is inevitable, Subramanian said this could be less than the second wave.
“We have vaccinated around 370 million people with one shot, and as research is showing, even one shot is giving immunity. So, if you take into account the vaccination, the health impact of the third covid wave may not be as intense as the second wave. The economic impact of the second covid wave was not as large as the first wave, even though the second wave was so devastating. Even if there is some impact of the impending third wave, what has been done in the second wave can be replicated for the third wave," he added.
