FIGHT AGAINST INFLATION

Govt. Announced Several Measures To Cool Inflation

    After a long spell comes a great sigh of relief as the government announced several measures to cool inflation, including a sharp cut in central excise duty on petrol by ₹8 per litre and on diesel by ₹6 per litre along with reduction in customs duty for raw materials of plastics and steel and an increase in export duty on iron ore and steel intermediates. Beneficiaries of the Ujjwala scheme will also get a ₹200 per cylinder subsidy on cooking gas. The Centre will be foregoing Rs 1 lakh crore in tax revenue in the current financial year as a result of the excise duty cut. Oil-marketing companies will pass on the excise duty cut to consumers despite losing Rs 13.08 a litre on petrol and Rs 24.09 per litre on diesel because of holding rates.

    These fiscal steps will complement the monetary tightening initiated by the RBI in April meet and via a surprise rate hike on May 5. Retail inflation beat analysts’ expectations and surged to a 95-month high of 7.79% in April on a broad-based rise in price pressure across food, fuel and core segments, bolstering the chances of another round of aggressive rate hike by the central bank in June to break the back of inflation. Wholesale price inflation hit 15.08% in April, the highest since September 1991.

      Total excise duty on petrol was Rs 19.98 per litre in 2019 and Rs 15.83 a litre on diesel. The Centre raised excise duty twice in 2020 to Rs 32.98 per litre on petrol and to Rs 31.83 on diesel. The duty was moderated to Rs 32.90 a litre on petrol and Rs 31.80 on diesel in the FY22 budget. And it was cut by Rs 5 a litre on petrol and Rs 10 per litre on diesel in November last year after retail prices jumped to record high across the country. The shareable part of the auto taxes has shrunk in recent years. For instance, while as much as 41% of the Central taxes on diesel were shared with the states under the relevant formula in FY15, just 5.7% is currently being shared with the states. The last increase in petrol and diesel prices was 80 paise/litre on April 6. Between March 22 and April 6, there were 14 hikes, adding up to Rs 10/litre for both petrol and diesel. 

    Post-November 2021 reduction, 25 states and UTs had cut VAT to give further reprieve to consumers battered by record-high retail prices. However, states ruled by non-NDA parties like Maharashtra, Andhra Pradesh and Tamil Nadu had not reduced VAT. After that reduction, state-owned oil firms kept petrol and diesel prices unchanged for a record 137-day period during which international oil prices rose from USD 84 per barrel to a nearly 14-year high of USD 140. They finally broke the hiatus with a ₹10 per litre increase on both petrol and diesel in 16 days starting 22 March but again hit the freeze button after the last revision on 6 April. 

    As the retail fuel prices came under pressure due to costlier crude and prices of went past the Rs 100 per litre mark, Prime Minister Narendra Modi on April 27 criticised Opposition-ruled states. These state, however, haven’t cut taxes and argued that since it was the Centre which hiked the taxes in the first place, it was incumbent on it to lower the imposts.

    While the Centre’s tax revenues from the two fuels surged from Rs 2.25 trillion in FY18 to Rs 3.35 trillion in FY22, a growth of nearly 50% and has remained around Rs 3.35 trillion in FY22 despite a duty cut in November. The states’ revenues from the fuels grew from Rs 1.86 trillion in FY18 to Rs 2.52 trillion in FY22, a growth of 35%. It is estimated that every 10% rise in Indian basket of crude will stoke consumer price inflation by 0.4 percentage points and drag down GDP growth by 0.2 percentage point.

    This decision may not impact FY23 budget significantly but the cut will certainly help reduce inflation directly. Decline in transport costs will help check spill-over impact of high fuel prices. The government’s swift action shows its intent to bring down the burden on the common man, in addition to bringing down input cost for many sectors… and we do hope that following the Centre, state governments will also respond in the same manner, bringing further relief.