The excise duty cut on petrol and diesel is credit negative for India as it will reduce government revenue and increase fiscal deficit by 0.1 per cent to 3.4 per cent of GDP in the year ending March 2019, Moody’s Investors Service said on Tuesday.
Also, the earning of public sector oil marketing companies (OMCs) would be “negatively affected” as they also absorbed Rs 1 per litre cut in their pricing, Moody’s said.
The government on Friday cut excise duty on petrol and diesel by Rs 1.5 a litre, sacrificing Rs 10,500 crore revenue in the current financial year.
“Overall, excise duty cuts are credit negative because they will reduce government revenue collection and increase India’s fiscal deficit,” Moody’s said in a statement.
The US-based rating agency said that these measures create downside risks to the central government’s fiscal deficit target of 3.3 per cent of GDP for fiscal 2018.
“Because the government had already met 94.7 per cent of the budgeted annual deficit by August 2018, to achieve its deficit target it will likely need to compress capital expenditure. Consequently, we expect the central government deficit target to slip modestly to 3.4 per cent of GDP, while the combined general government deficit (central and state) should remain at about 6.3 per cent of GDP,” Moody’s said.
It said that the government revenue from excise duties on petroleum products has more than doubled since fiscal 2014. State governments charge value added tax (VAT) on fuel as a percentage of prices and have therefore benefited from rising oil prices.
The centre had appealed to state governments to cut VAT rates on petrol and diesel by Rs 2.5 per litre, following which several BJP and NDA ruled states like Maharashtra, Gujarat, Uttar Pradesh, Tripura, Assam, Jharkhand, Haryana, Himachal Pradesh and Madhya Pradesh followed suit.
India deregulated petrol and diesel prices in 2010 and 2014, respectively, and moved to daily revision in fuel prices in June 2017.
Moody’s said that the fuel excise cut is expected to have a limited effect on GDP growth.
Moody’s had last year raised India’s sovereign rating for the first time in over 13 years to ‘Baa2’ on growth prospects boosted by continued economic and institutional reforms.