Oil duty cuts to impact fiscal deficit: Montek Singh Ahluwalia

Planning Commission deputy chairman Montek Singh Ahluwalia today said the duty cuts on crude and oil products will have a "negative impact" on fiscal deficit, but ruled out any protracted effect on inflation due to the oil price hikes.

"Certainly, the duty cuts will have a negative impact on fiscal deficit," Ahluwalia said, adding that in a rising global oil price scenario,increasing the retail price was inevitable. The Budget had pegged fiscal deficit for this fiscal at 4.6%, down from 5.1% in FY11.

After months of dithering, the government last Friday increased diesel price by Rs 3 a litre, cooking gas by Rs 50 a cylinder and kerosene by Rs 2 per litre. But to soften the impact of these price hikes on the common man, it has also re-jigged the duty structure.

While the government abolished the 5% customs or import duty on crude and slashed the same on diesel and petrol to 2.5% from 7.5%, it also reduced excise duty on oil products from 7.5 to 2.5 percent, incurring a revenue loss of Rs 49,000 crore this fiscal.

The reduction in excise duty on diesel would lead to a revenue loss of Rs 23,000 crore this fiscal, while the customs duty cut will see a loss of another Rs 26,000 crore. The price hikes would help oil companies limit their revenue loss by Rs 21,000 crore, but still would end the fiscal with about Rs 1,20,000 crore of revenue loss.

Keeping the oil prices low in an artificial manner would have weakened the economy and the oil sector, Ahluwalia said, adding the hikes will have a temporary effect on inflation as it will wear off in three-four months.

If the government had prolonged the fuel price hike announcement, it could have had an impact on fiscal deficit, which in turn would have impacted inflation, he explained.