Govt revenues may rise marginally too as global crude prices are not expected to drop steeply
The government's move to hike the special excise duty and the road and infrastructure cess by Re 1 per litre each in the Budget is likely to marginally lift their revenue without much impact on Consumer Price Index (CPI) and Wholesale Price Index (WPI) inflations.
Finance minister Nirmala Sitharaman's decision increases the special excise duty component in the price of branded and unbranded petrol to Rs 8 per litre from the earlier Rs 7. For branded and unbranded diesel, it moves up to Rs 2 per litre from Re 1.
At the same time, the road and infrastructure cess component in these categories are up to Rs 9 per litre from Rs 8 per litre.
Overall levies, including basic excise duty, in the prices of branded petrol, unbranded petrol, branded diesel and unbranded diesel have risen to Rs 19.98 per litre, Rs 21.6 per litre, Rs 15.83 per litre and Rs 18.19 per litre after July 5 from Rs 17.98 per litre, Rs 19.16 per litre, Rs 13.83 per litre and Rs 16.9 per litre, respectively.
In addition to the increase in the duty and cess on the retail prices of petrol and diesel, the government has also introduced a basic duty of Re 1 per tonne on the manufacture of petroleum crude under the Central Excise Tariff Act, 1985.
Sitharaman said the hikes in the levies were in view of the easing crude prices in recent times and had been done to shore up government revenues for funding their various infrastructure and social welfare projects.
D K Srivastava, chief policy advisor, EY India, estimates an overall impact of the additional taxes on WPI inflation at 0.40% and does not see it affecting CPI inflation perceptibly.
"The impact would be around 0.4% on the WPI," he told DNA Money.
He expects the component of value-added tax (VAT), levied by states, also to slightly go up as it is charged on an ad valorem basis. "Even if the VAT continues to be the same, there would be some upward increase in fuel prices, but only by a small fraction," he said.
In May, WPI came at 2.45%. He expects it to climb up to around 2.5-3% in coming months. Generally, a marginal upswing in fuel prices does not quickly reflect in the CPI or WPI inflation as the weightage given the item is not very high.
Fuel and light account for just 7% of the CPI while fuel and power are 13% of the WPI, down from around 15% earlier. Therefore, a small revision in petrol and diesel do not immediately reflect in these two indices unless they are done on a sustained basis.
Srivastava said changes in petrol and diesel rates directly affect fuel, then light and later on transportation. Thereafter, due to the incremental cost of transport, its impact is played out across all commodities.
The crux of the hike in fuel levies is to boost revenues. Over the last few years, as per official data, the government's gross revenues from petroleum, oil and lubricants (POL) has shot up several folds from less than a lakh crore of rupees at Rs 88,600 crore in FY14 to over Rs 2.5 lakh crore in FY19.
The first term of the National Democratic Alliance (NDA-1) had seen global crude prices hit a low of $36.45 per barrel in June 2016 from a high of $113.17 per barrel in June 2014 but the government did not lower prices proportionately. Instead, it increased the special excise duty rate in the prices of petrol and diesel. This led the government's gross revenues from POL to more than double during this period to Rs1.86 lakh crore in FY16 from Rs88,600 crore in FY14.
The gross revenue rose because the NDA-1 had the comfort of lower global crude prices to increase the specific tax component of the excise duty. The excise duty constitutes of ad valorem and specific tax. Today, the specific tax is a large part of it.
However, the recent tweak in the special excise duty and road and infrastructure cess in the Budget is unlikely to push up the already high government revenue any further.
Srivastava believes the government's budgetary move was in anticipation of a fall in crude prices. Though, he does not foresee any significant hike in the levies or a steep fall in global crude prices from here on.
Global crude prices have eased from $74.28 per barrel in September last year to $58.47 per barrel in June. This must have offered the NDA-II, which recently returned to power with a thumping majority, to go for an upward revision in the two levies. A softer WPI of 2.45% in May must have also guided its hand.
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